Calculating Share Price Using DCF Calculator

An advanced tool for investors to determine a stock’s intrinsic value by calculating share price using DCF (Discounted Cash Flow) analysis.

Projected Free Cash Flow and Present Value over 5 Years

Year	Projected FCF	Present Value of FCF

What is Calculating Share Price Using DCF?

Calculating share price using DCF (Discounted Cash Flow) is an intrinsic valuation method used to estimate the value of an investment based on its expected future cash flows. The core idea is that the value of a company is not what its stock price is today, but what it’s worth based on all the cash it will generate in the future. This method is favored by fundamental investors because it relies on the business’s underlying financial strength rather than market sentiment. By projecting a company’s free cash flow and discounting it back to the present day, an analyst can arrive at an “intrinsic value” for the entire company. This value, when divided by the number of shares outstanding, gives a per-share value that can be compared against the current market price.

The Formula for Calculating Share Price Using DCF

The DCF process involves several steps and formulas to arrive at the final share price. The main formula discounts future cash flows (CF) by the discount rate (r) for each period (n). The process can be summarized as follows:

1. Project Future Free Cash Flows (FCF): Estimate the company’s unlevered free cash flow for a specific forecast period, typically 5-10 years.
2. Calculate Terminal Value (TV): Estimate the value of the company beyond the forecast period. The Gordon Growth Model is common:
   TV = [FCF_n * (1 + g)] / (r – g)
3. Discount FCF and TV: Discount all projected FCF and the Terminal Value back to their present values using the discount rate (typically WACC).
4. Calculate Enterprise Value (EV): Sum the present values of all future FCF and the present value of the Terminal Value.
5. Calculate Equity Value: Subtract the company’s net debt from its Enterprise Value.
6. Calculate Intrinsic Value Per Share: Divide the Equity Value by the total number of shares outstanding.

Variables Table

Variable	Meaning	Unit	Typical Range
FCF	Free Cash Flow	Currency ($)	Varies by company size
r (WACC)	Discount Rate / Weighted Average Cost of Capital	Percentage (%)	5% – 15%
g	Perpetual/Terminal Growth Rate	Percentage (%)	1% – 3%
n	Forecast Period	Years	5 – 10 years

For more details on WACC, check out our guide on WACC calculation.

Practical Examples

Example 1: Stable Growth Company

Imagine a company with a current FCF of $100 million, a stable FCF growth rate of 5%, a WACC of 8%, a terminal growth rate of 2%, 50 million shares outstanding, and net debt of $200 million. By calculating the share price using DCF, we project FCF for 5 years, find the terminal value, discount everything back, and find an intrinsic value higher than its current price, suggesting it might be undervalued.

Example 2: High Growth Company

Consider a tech startup with FCF of $20 million but an expected FCF growth of 20% for the next 5 years. Its WACC might be higher, say 12%, due to higher risk. The terminal growth is assumed at 3%. Even with a lower starting FCF, the high growth results in a substantial terminal value. After using a discounted cash flow model, the resulting high intrinsic value explains why high-growth stocks often trade at high multiples.

How to Use This Calculator for Calculating Share Price Using DCF

1. Enter Free Cash Flow: Input the most recent, full-year Free Cash Flow (FCF) for the company.
2. Set Growth Rates: Provide a short-term FCF growth rate for the next 5 years and a perpetual growth rate for the terminal value. The terminal rate should be conservative.
3. Input Discount Rate: Enter the Weighted Average Cost of Capital (WACC). This is a critical input that reflects the riskiness of the company.
4. Add Share and Debt Info: Enter the number of shares outstanding (in millions) and the company’s total net debt.
5. Analyze Results: The calculator provides the intrinsic value per share. Compare this to the current market price. The intermediate values provide insight into the components of the valuation, such as the terminal value formula‘s impact.

Key Factors That Affect DCF Valuation

• Discount Rate (WACC): A higher WACC significantly lowers the valuation, as it implies higher risk and discounts future cash flows more heavily.
• Growth Rates: Both short-term and terminal growth rates are powerful drivers. Overly optimistic assumptions can lead to an inflated valuation.
• Forecast Period: A longer forecast period can increase valuation but also adds more uncertainty.
• Net Debt: Higher debt reduces the equity value, directly impacting the final share price.
• Starting FCF: The base FCF is the foundation of the entire model. An inaccurate starting point will skew all future projections.
• Terminal Value Assumptions: The terminal value often accounts for over 60-80% of the total value, making it extremely sensitive to changes in the terminal growth rate and WACC.

Using an intrinsic value calculator is one of many stock valuation methods available to investors.

Frequently Asked Questions (FAQ)

1. What is a good terminal growth rate for a DCF?

A good terminal growth rate is typically between the rate of inflation (1-2%) and the long-term GDP growth rate (2-3%). A rate higher than this is generally considered unsustainable in perpetuity.

2. Why is WACC used as the discount rate?

WACC is used because unlevered free cash flow (FCFF) is the cash available to all capital providers (both debt and equity holders). WACC represents the blended, weighted cost of this capital.

3. Is calculating share price using DCF always accurate?

No. DCF valuation is highly sensitive to its inputs, which are assumptions about the future. It provides an estimate of intrinsic value, not a guaranteed price. Small changes in assumptions can lead to large changes in valuation.

4. What’s the difference between Enterprise Value and Equity Value?

Enterprise Value is the total value of the company’s core business operations, belonging to all capital providers. Equity Value is the value belonging only to shareholders, calculated by subtracting net debt from the Enterprise Value.

5. Can I use this for companies that don’t pay dividends?

Yes. Calculating share price using DCF is ideal for companies that don’t pay dividends because it focuses on free cash flow, which represents the company’s ability to generate cash, regardless of its dividend policy.

6. How long should the forecast period be?

A forecast period of 5 years is common, but 10 years can be used for companies with a longer predictable growth runway. The goal is to forecast until the company reaches a stable state of growth.

7. What if a company has negative Free Cash Flow?

If a company has negative FCF and is expected to continue having it for years, a DCF valuation may not be suitable. This is common for early-stage growth companies, where other valuation methods might be more appropriate.

8. What is the difference between FCFE and FCFF?

Free Cash Flow to the Firm (FCFF or unlevered FCF) is cash available to all capital providers, so it’s discounted by WACC. Free Cash Flow to Equity (FCFE) is cash available only to shareholders after debt obligations are paid, so it’s discounted by the cost of equity. Our calculator uses the more common FCFF approach.

Related Tools and Internal Resources

Explore other financial tools and content to deepen your understanding of financial modeling basics.

• Intrinsic Value Calculator: Another tool for estimating a stock’s true worth.
• WACC Calculation Guide: A deep dive into calculating the Weighted Average Cost of Capital.
• Terminal Value Formula Explained: Understand the most critical component of a DCF model.
• Stock Analysis Tools: A suite of tools for equity research.
• Equity Research Reports: Read our latest analysis on public companies.
• Discounted Cash Flow Model: A more detailed explanation of the model.