Discounted cash flow (DCF) is a valuation method that estimates what a company is worth today based on the cash it is expected to generate in the future. Each future cash flow is discounted back to present value using a discount rate, usually the WACC, and the results are summed, along with a terminal value.
Worked example
A company expected to generate $100 next year, growing modestly, discounted at an 8% WACC with a terminal value, might be valued at, say, $1,500 — the sum of all those present values. Change the discount rate to 10% and the value falls.
Why it matters
DCF is the most theoretically complete valuation method because it ties value directly to cash generation. Its weakness is sensitivity: small changes in the growth and discount-rate assumptions produce large changes in the answer.
Frequently asked questions
For a whole-company valuation, the WACC. The terminal value, which often makes up most of the total, is especially sensitive to both the discount rate and the assumed long-term growth rate.