DCF Stock Valuation

Chapter 1: The Three Pillars of DCF Modeling

To produce an accurate valuation on the Efficient Frontier of finance, you must calibrate the three primary variables of the engine.

1. Free Cash Flow (The Fuel)

Unlike "Net Income" or "EPS," Free Cash Flow (FCF) is the actual cold, hard cash left in the bank after a company has paid its operating bills and invested in its physical assets (CapEx). It is the only number that can be legally paid out as dividends or used for share buybacks. If a company has high earnings but low FCF, it is often a sign of Aggressive Accounting or a capital-intensive "Treadmill" business model.

2. The Discount Rate (WACC)

The WACC (Weighted Average Cost of Capital) is the required rate of return that investors demand for taking on the risk of the business. Linguistically, you can think of this as the "Hurdle Rate." If a stock is highly volatile (like a biotech startup), the WACC should be high ($12\% - 15\%$). If the stock is a stable utility, the WACC can be lower ($7\% - 9\%$). High WACC results in a lower valuation today because you are penalizing future cash more heavily for its risk.

3. Growth Rate (The Trajectory)

Our tool allows you to set a CAGR (Compound Annual Growth Rate) for the next decade. Value investors are notoriously conservative here. While a company might grow at 30% for two years, maintaining that growth for 10 years is statistically rare. We recommend using a "Historical Median" rather than an "Analyst Consensus" to avoid over-valuation.

Chapter 2: Deciphering the Terminal Value Trap

In most DCF models, the Terminal Value accounts for 60% to 80% of the total valuation. This is the projected value of the company from Year 11 until the end of time. Because this number is so large, small changes in the Terminal Growth Rate can swing the valuation by hundreds of dollars. Quant practitioners typically cap terminal growth at the rate of long-term GDP growth (around 2-3%). Assuming a company can grow at 5% forever is assuming that the company will eventually become larger than the entire global economy—a mathematical impossibility.

Chapter 3: Enterprise Value vs. Equity Value

The DCF Model first calculates the "Enterprise Value" ($EV$)—the total value of the company's business operations. To find the "Equity Value" (what is available to you as a shareholder), we must perform the "Capital Stack Audit":

By adding the cash and subtracting the debt, we arrive at the "Market Cap" that the company should have according to the math. Dividing this by the Shares Outstanding gives us the "Intrinsic Value Per Share."

Chapter 4: Qualitative Inputs to the Quantitative Model

A DCF is only as good as the human narrative behind the numbers. Before sliding the growth bar in our tool, ask yourself these Linguistic Logic questions:

• Does the company have a "Moat"? A structural advantage (like a brand or patent) that prevents competitors from eroding profit margins.
• Is the industry expanding? It is much easier for a company to grow at 10% in a tailwind industry (AI, Green Energy) than in a headwind industry (Traditional Print Media).
• Capital Allocation: Does management use the FCF to buy back shares (good for valuation) or to acquire overpriced competitors (bad for valuation)?

Chapter 5: Why Local-First Data Privacy is Mandatory

Your investment "Watchlist" and the assumptions you make about specific companies are your most valuable intellectual property. Most "Free Stock Calculators" online harvest your inputs to build marketing profiles or to track "Retail Sentiment" for institutional traders. Toolkit Gen's DCF Valuation Model is a local-first application. 100% of the discounting calculus and chart renderings happen in your browser's local RAM. We have zero visibility into your analysis. This is Zero-Knowledge Fundamental Research for the sovereign investor.

Frequently Asked Questions (FAQ) - Intrinsic Value Mastery