HOW TO LEARN TO

BUILD A DISCOUNTED
CASH FLOW MODEL?
DCF MODELLING TERMINOLOGY
Free Cash Flow (FCF): This represents the cash
generated by a business after accounting for
operating expenses and capital expenditures. FCF
is a critical input for DCF modeling.

Discounted Cash Flow (DCF) Analysis: The overall

process of estimating the present value of future
cash flows, which includes calculating the present
value of both projected cash flows and the
terminal value.

WACC (Weighted Average Cost of Capital):

WACC is the average rate of return a company is
expected to pay to its investors, taking into
account the cost of debt, cost of equity, and cost
of preferred stock.

Perpetuity Growth Rate: Often used in the terminal

value calculation, this is the assumed rate at
which cash flows are expected to grow indefinitely
after the projection period.
DCF MODELLING TERMINOLOGY
Discounting: The process of adjusting future
cash flows to their equivalent value in today’s
dollars, considering the time value of money.

Net Present Value (NPV): NPV is the difference

between the present value of cash inflows and
the present value of cash outflows. It is used to
determine whether an investment is worthwhile.

Sensitivity Analysis: This involves testing the

impact of changes in key assumptions or
variables on the DCF model to assess its
sensitivity to different scenarios.

Cost of Equity: The return required by the

company’s shareholders. It can be calculated
using the Capital Asset Pricing Model (CAPM) or
other methods.
DCF MODELLING TERMINOLOGY
Cost of Debt: The interest rate a company pays
on its outstanding debt, which is a crucial
component of WACC.

Discount Factor: The factor used to discount

future cash flows to their present value,
calculated as 1 / (1 + discount rate)^n, where “n”
is the number of years into the future.

Revenue Growth Rate: The expected annual

increase in a company’s sales or revenue, a
critical factor in projecting future cash flows.

EBITDA (Earnings Before Interest, Taxes,

Depreciation, and Amortization): A measure of
a company’s operating performance often used
in DCF analysis.

Scenario Analysis: Similar to sensitivity analysis,

scenario analysis involves testing different
combinations of assumptions to understand the
range of potential outcomes.
 6 STEPS TO BUILD A DCF MODEL

1. Gather Historical Financial Data

2. Forecast Future Cash Flows
3. Determine the Discount Rate
4. Calculate the Present & Terminal Value
5. Calculate the DCF Valuation
6. Conduct sensitivity analysis
 THE TOOL TO LEARN DCF MODELLING

Sensitivity analys is one of the trickiest parts to master

because there are many accounts that interact with
one another.

Luckily, there is one resource that I discovered which is

super useful for learning this: FinancialModellingPrep.
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