Apple's price and P/E, live
The four steps of a DCF, one at a time
Step 1: Forecast free cash flows for the next 5-10 years based on revenue growth, margins, and capital needs.
Step 2: Estimate terminal value -- what the business is worth after your forecast period (usually using a growth rate of 2-3%).
Step 3: Discount everything back to present value using WACC (the company's cost of capital). A dollar next year is worth less than a dollar today.
Step 4: Calculate margin of safety -- how far below your estimate the stock trades. This platform uses (intrinsic value - price) / intrinsic value. Some use price as denominator instead.
Margin of safety, in one line
Margin of safety is the gap between your DCF estimate of intrinsic value and the price you pay -- your buffer against a wrong assumption, expressed as (intrinsic value - price) / intrinsic value. Because a DCF is so sensitive to its inputs, that buffer is what keeps a modeling error from becoming a permanent loss. How to size it -- and why a disciplined investor measures it against the conservative low end of their range, not the best guess -- is covered in full in Personal Finance → Value Investing › Margin of Safety.
Compare a DCF estimate to the market price
Why a DCF needs a margin of safety
How much to trust a big DCF upside
Discounting a growing cash-flow stream
The audit critique of this module was fair: a DCF lesson should discount at least one cash flow. The widget below does the real arithmetic — a growing cash-flow stream discounted year by year (closed form), plus a terminal value. Watch how hard the answer leans on g and r.
The formula behind a discounted-cash-flow estimate
Intrinsic Value ≈ FCF × (1 + g)^1 / (1 + r)^1 + FCF × (1 + g)^2 / (1 + r)^2 + … (over N years)
Sit with the ideas.
A DCF model says a stock is worth $150 but it trades at $100. What is the margin of safety?