DCF models estimate future free cash flows over a forecast horizon plus a terminal value, then discount them at the cost of capital to arrive at a fair equity value.
DCFs are famously sensitive to inputs — small changes in growth or discount rate produce wildly different valuations. Use ranges, not point estimates.
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Open Decision Lab →Frequently asked questions
Is DCF reliable?
It's rigorous but assumption-heavy. It's most useful for stable, cash-generative businesses; less so for unprofitable growth companies.