Apple's price, market cap, and P/E, live
The discounted cash flow formula
Intrinsic Value = Σ [FCFₜ / (1 + WACC)ᵗ] + Terminal Value / (1 + WACC)ⁿ
The three parts of a DCF and their inputs
| DCF Component | What It Captures | Key Input |
|---|---|---|
| Projected FCFs | Near-term cash generation (typically 5–10 years) | Revenue growth, margins, capex |
| Discount Rate (WACC) | Time value of money + risk premium | Cost of equity, cost of debt, capital structure |
| Terminal Value | All cash flows beyond projection period | Perpetual growth rate or exit multiple |
Why a precise DCF number can still mislead
A DCF is only as good as its assumptions. The model gives you a precise number, but that precision is an illusion — the real value is in understanding which assumptions drive the answer and how sensitive the output is to each one.
Reverse-engineer the growth the market assumes
What it means when your DCF is below the price
A DCF is only as strong as its assumptions
The bridge from enterprise value to a per-share value
Equity Value = EV − Net Debt − Preferred Stock − Minority Interest + Non-Operating Assets; Per-Share Value = Equity Value ÷ Diluted Shares Outstanding
Why minority interest comes out and non-operating assets go back in
Minority interest (also called noncontrolling interest) exists because accounting consolidation is all-or-nothing: when a company owns more than 50% of a subsidiary but less than 100%, its financial statements include ALL of the subsidiary’s revenue, EBITDA, and cash flow. An enterprise value built on those consolidated cash flows therefore includes value that belongs to the subsidiary’s other owners — you subtract it because your shareholders don’t own it. Non-operating assets work in the opposite direction: excess cash beyond operating needs, investment portfolios, and unconsolidated minority stakes produce no free cash flow in your forecast, so the DCF never counted their value — you add them back because your shareholders DO own them.
A worked bridge on illustrative numbers
| Bridge step | Amount (illustrative) | Running total |
|---|---|---|
| Enterprise value | $10.0B | $10.0B |
| Less: net debt | −$2.0B | $10.0B − $2.0B = $8.0B |
| Less: preferred stock | −$0.5B | $8.0B − $0.5B = $7.5B |
| Less: minority interest | −$0.3B | $7.5B − $0.3B = $7.2B |
| Plus: non-operating assets | +$0.8B | $7.2B + $0.8B = $8.0B |
| Equity value | $10.0B − $2.0B − $0.5B − $0.3B + $0.8B = $8.0B | $8.0B |
| Per diluted share (400M shares) | $8.0B ÷ 400M = $20.00 | $20.00 per share |
The mid-year convention explained
Going deeper (optional). Up next: The mid-year convention — a small timing refinement to the discounting exponent that practitioners apply in real models. Skip it on first pass and come back anytime.
Going Deeper — A standard DCF discounts year-N cash flow by (1 + r)^N, as if the entire year’s cash lands in one lump on December 31. In reality, cash comes in throughout the year — so on average it arrives around mid-year. The mid-year convention fixes this by discounting each year at (1 + r)^(N − 0.5): same cash flows, same rate, just half a year less discounting. The effect is a small, uniform uplift to every discounted cash flow — roughly a factor of (1 + r)^0.5, which is about 4.9% at a 10% discount rate. That’s the whole idea: no new inputs, no new theory, just an exponent change that better matches when the cash actually shows up.
Sit with the ideas.
A company generates $100M in FCF today, growing at 5% annually. With a WACC of 10%, what is the approximate value of next year's FCF in today's dollars?
DCF a stock — buy with margin of safety
Run a back-of-envelope DCF on a stock you've researched. Estimate fair value. Paper-buy ONLY if the current market price is at least 25% below your fair-value estimate. If it isn't, write down why you waited.
Open paper portfolio →Practice mode — simulated trades, not investment advice.