How to Calculate the Stock Value Using the Discounted Cash Flow
- 1). Project free cash flow for the period you want to forecast stock value over. In general, 5 to 10 years are used. You can apply your own growth rate to cash flows over the years or determine based on your own experience.
- 2). Determine a discount rate. The discount rate is the 5 to 10 year interest rate on U.S. Treasuries. See Resources for a link to the Treasury Daily Yield Curve.
- 3). Discount projected free cash flows to the present for each year. You must use a present value of cash flows formula. Either use a financial calculator for DCF or Present Value of Cash Flows or use an online calculator. See Resources for an example. You will need to know the amount of the cash flows projected for that year, the number of years you are projecting and the discount rate.
- 4). Sum the present value of projected cash flows for a total present value for today over the 5 to 10 years that you projected cash flows.
- 5). Calculate the perpetuity at the end of the cash flow. This is called the terminal value. A perpetuity is a perpetual stream of cash flows. This is the last year of cash flows divided by the discount factor. Now discount this amount back using the same discount rate.
- 6). Add the values from Steps 4 and 5 and divide the sum by the number of shares outstanding for the company, which can be found on the balance sheet.