Discounted cash flow (DCF) models estimate the intrinsic value of a company based on the present value of the cash flows it is expected to generate in future operating periods.

Free Cash Flow to Firm (FCFF)

The baseline cash flow metric used in institutional DCF analysis is Free Cash Flow to Firm (FCFF), which represents the cash available to all capital providers (both equity holders and debt providers) after meeting all operating expenses, taxes, working capital changes, and required capital expenditures:

$$\text{FCFF} = \text{EBIT} \times (1 - t) + \text{D\&A} - \Delta\text{NWC} - \text{CapEx}$$

Where: - $t$ is the effective corporate tax rate. - $\text{D\&A}$ is depreciation and amortisation (non-cash charge added back). - $\Delta\text{NWC}$ is the net change in non-cash working capital. - $\text{CapEx}$ represents cash outflows for property, plant, and equipment.

The Discount Rate: WACC

Future cash flows are discounted back to the present day using the Weighted Average Cost of Capital (WACC), which reflects the blended cost of equity and post-tax debt:

$$\text{WACC} = \left(\frac{E}{V} \times K_e\right) + \left(\frac{D}{V} \times K_d \times (1 - t)\right)$$

Where $K_e$ is estimated using the Capital Asset Pricing Model (CAPM): $K_e = R_f + \beta \times (R_m - R_f)$.

Terminal Value and Enterprise Value

Because a company can operate indefinitely, cash flows beyond the explicit discrete forecast period (typically 5 or 10 years) are captured via the Terminal Value (TV), commonly computed using the Gordon Growth formula:

$$\text{Terminal Value} = \frac{\text{FCFF}_{n+1}}{\text{WACC} - g}$$

Adding the discounted discrete cash flows to the discounted terminal value yields the Enterprise Value. Deducting net debt (total debt minus cash and equivalents) produces the estimated Equity Value, which is divided by the total diluted share count to arrive at the estimated per-share intrinsic value.