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DCFCore·14 min·10 checks

Discounted cash flow

What a business is worth to the people who own its cash flows.

  • Finance
  • Financial analysis
  • Investing course
  • Certification

A DCF values a company as the present value of the cash it will generate for the rest of its life. Every other method (comparables, precedent transactions) tells you what the market is paying for similar assets. A DCF is the only one that tells you what the asset is actually worth on its own economics. That independence is its whole value, and also why it is so easy to abuse: change two assumptions and you can justify almost any number.

Take the courseFree. One attempt per check, saved as you answer.

What this course covers

  1. 01Forecast unlevered free cash flow
  2. 02Build the discount rate
  3. 03Discount each year to present value
  4. 04Calculate terminal value
  5. 05Bridge to equity value
  6. 06Sensitise, then interpret

What you will be able to do

  • The business has positive, reasonably forecastable free cash flow
  • You can defend a five-to-ten year view of revenue and margins
  • Capital structure is stable, or you can model how it changes
  • You need a value independent of what the market is currently paying

Where it does not apply

  • Pre-revenue or pre-profit companies, where the terminal value becomes the entire answer
  • Banks and insurers, where interest is operating revenue, so unlevered free cash flow is meaningless; use a dividend discount or residual income model
  • Deeply cyclical businesses at the top or bottom of a cycle, unless you normalise
  • Anything where you would be guessing at the growth rate rather than estimating it

Predict it first

Not marked

The market sells off and the risk-free rate rises. Nothing about the company changes: the same forecast, the same margins, the same balance sheet.

ChangeRisk-free rate: 4.2% → 6.2%

What happens to the value per share?
Commit to an answer before the model runs.

How this prepares you for the assessment

This is one of 17 courses, and none of them is required for the Verified Valuation Assessment. The credential is earned on two timed drills, graded by the same engine that checks this course, and the drill score decides what it says you are capable of, from Foundation through to Distinction.

  • Distinction90%+Works independently across all three core methods.
  • Merit75%+Builds the core models with limited supervision.
  • Pass60%+Understands the mechanics; works through a model with guidance.
  • FoundationcompletedKnows the vocabulary and the shape of each model.