Last updated: Abril 2026
Discounted Cash Flow (DCF): Step-by-Step Calculation Guide
Discounted Cash Flow (DCF) is the most widely used method by professional analysts to estimate a company's intrinsic value. According to the CFA Institute, DCF is considered the "gold standard" of company valuation because it's based on the fundamental premise that an asset's value equals the present value of all future cash flows it can generate.
What is discounted cash flow?
Discounted cash flow is a valuation technique that calculates how much future cash flows from a company are worth today. The logic is simple: R$ 100 received 5 years from now is worth less than R$ 100 received today, because money has an opportunity cost. DCF quantifies exactly this difference using a discount rate (WACC).
Direct vs indirect FCFF
| Aspect | Direct FCFF | Indirect FCFF |
|---|---|---|
| Data source | Direct projection of cash flows (CFS) | Projection of IS + CFS + Balance Sheet |
| Complexity | Lower — focus on flows | Higher — requires full projection |
| Precision | High for companies with stable CFS | Higher — captures cross-account interactions |
| Best for | Quick analyses and companies with consistent CFS history | Detailed analyses and companies with complex structures |
DCF Formula
The fundamental DCF formula is: Enterprise Value = Σ (FCFFt / (1 + WACC)^t) + Terminal Value / (1 + WACC)^n. Where FCFFt is the Free Cash Flow to the Firm in period t, WACC is the Weighted Average Cost of Capital, and Terminal Value captures all flows beyond the explicit projection period.
How to calculate WACC
WACC (Weighted Average Cost of Capital) is the discount rate reflecting the opportunity cost of all capital providers. It combines the cost of equity (calculated via CAPM) with the cost of debt (adjusted for tax benefit). The formula is: WACC = (E/V) × Re + (D/V) × Rd × (1 - Tc), where E is equity value, D is debt, V is total value (E+D), Re is cost of equity, Rd is cost of debt, and Tc is the tax rate.
Terminal value and perpetuity
Terminal value represents the value of all cash flows beyond the explicit projection period (typically 5-10 years). It's calculated using Gordon's formula: Terminal Value = FCFFn × (1 + g) / (WACC - g), where g is the perpetual growth rate. For Brazilian companies, perpetual growth rates between 2% and 4% are commonly used, reflecting expected long-term economic growth.
Sensitivity analysis
Sensitivity analysis shows how value per share changes when you adjust key assumptions — typically the discount rate (WACC) and perpetual growth rate. It generates a matrix revealing the range of possible values, helping you understand the risk of your estimate. On Valoro, this matrix is generated automatically from your assumptions.
Frequently asked questions
What is the difference between FCFF and FCFE?^
FCFF (Free Cash Flow to the Firm) is cash flow available to all capital providers (shareholders + creditors). FCFE (Free Cash Flow to Equity) is flow available only to shareholders, after debt payments. Valoro uses FCFF, which is the most adopted for company valuation.
Why is DCF considered the best valuation method?^
Because DCF is based on fundamentals — the actual cash flows a company can generate. Unlike multiples, which depend on market comparables, DCF captures intrinsic company value regardless of market sentiment.
Does DCF work for any company?^
DCF works best for companies with predictable cash flows. For pre-revenue startups or companies in restructuring, multiples or asset-based methods may be more appropriate.
How to choose the correct discount rate?^
The discount rate (WACC) should reflect investment risk. For Brazilian companies, rates between 10% and 15% are common, depending on sector, leverage, and country risk. CAPM (Capital Asset Pricing Model) is the most used method to calculate cost of equity.
Apply DCF in practice with Valoro
Use our guided flow to create a complete DCF valuation with real B3 data.