How much is a company really worth? Not its stock price, but its true, underlying value. This is the central question of corporate valuation. The most direct way to answer it is through a Discounted Cash Flow (DCF) analysis. The core idea is simple: a company's value today is the sum of all the cash it will generate in the future, with each of those future cash flows adjusted for risk and the time value of money.

To perform this analysis, we first need to define the specific type of cash flow we're interested in. For valuing an entire enterprise, analysts turn to Free Cash Flow to the Firm.

Free Cash Flow to the Firm (FCFF) represents the total cash a company produces before any debt payments. It's the cash available to all of the company's capital providers, both equity shareholders and debtholders. Think of it as the total economic earnings generated by the business operations.

Forecasting each of these components is the first step in building a DCF model. This requires a deep understanding of the company's business, its industry, and the broader economic environment. Historical performance is a guide, but the real work lies in making justified assumptions about the future.

A DCF analysis typically has two parts. First, there's an explicit forecast period, usually 5 to 10 years, where we project the FCFF for each year. After that, it becomes impractical to forecast year by year, so we calculate a single number to represent the value of all cash flows from that point into perpetuity. This is called the Terminal Value (TV).

There are two common ways to calculate Terminal Value.

1. The Perpetuity Growth Method: This approach, also known as the Gordon Growth Model, assumes the company will grow at a stable, constant rate forever. This growth rate is typically low, somewhere between the rate of inflation and the long-term GDP growth rate. A growth rate higher than the economy's is unsustainable in the long run.

2. The Exit Multiple Method: This method assumes the company will be sold at the end of the forecast period. We estimate the sale value by applying a valuation multiple, like EV/EBITDA, to the final year's projected metric. The multiple is usually based on what similar companies are trading at in the market today.

Once we have our projected cash flows (FCFF for years 1-10 and the Terminal Value), we need to bring them all back to their present value. Money tomorrow is worth less than money today. The rate we use to 'discount' these future cash flows is the Weighted Average Cost of Capital (WACC).

The trickiest part of the WACC is calculating the Cost of Equity ($R_e$). For that, we use the Capital Asset Pricing Model (CAPM). CAPM defines the expected return on a stock based on its sensitivity to overall market movements.

With the WACC calculated, you can discount each projected FCFF and the Terminal Value back to year zero and sum them up. The result is the Enterprise Value of the company. After subtracting the company's debt, you're left with the Equity Value, which, when divided by the number of shares, gives you an intrinsic value per share. This final number is the culmination of dozens of assumptions, making sensitivity analysis a crucial final step to understand how changes in key drivers affect the valuation.