DCF Fair Value — Understand It in 5 Minutes Without Excel

📅 2026-05-06 · 10 min read · StockInto Guide

"Is this stock priced fairly?" The most academically honest answer comes from DCF (Discounted Cash Flow). Buffett himself defined intrinsic value as "the sum of all future cash flows discounted to today". This article walks through DCF's three core concepts — forecast, terminal value, discount rate — with a couple of formulas, and discloses StockInto's exact assumptions.

The one-line summary
Cash the company will earn over the next 5 years + everything earned forever after → all converted to "what if I received it today" → summed → divided by shares outstanding = fair price per share.

Why DCF?

Relative metrics like PER and PBR tell you "is this cheap or expensive vs. similar companies?" But when the entire market is in a bubble, PER comparisons are meaningless. DCF is different — it estimates "how much will this specific company earn in the future?", giving you an absolute value independent of market mood.

The downside: DCF is extremely sensitive to assumptions. Changing growth rate by 0.5% can move the fair value by 30%. So conservative assumptions are critical.

STEP 1 · Forecast 5 years of FCF

Why 5 years?

FCF (Free Cash Flow) = operating cash flow - capital expenditures (CapEx). The real cash a company keeps each year. 5 years is long enough to capture a meaningful business cycle while still being predictable. 10-year forecasts are too uncertain; 1-2 years miss the cycle.

FCF₁ = FCF₀ × (1 + g) FCF₂ = FCF₁ × (1 + g) ... # build out 5 years # g = 5-year growth rate (StockInto: avg of revenue and EPS growth, clamped 2-25%)

How is g chosen? The average of revenue growth and EPS growth from historical data. A company growing 30% in the past won't realistically sustain 30% over 5 years, so we cap at 25%; even loss-makers get a minimum of 2%.

STEP 2 · Terminal Value

What about year 6 and beyond?

If the company doesn't go bankrupt in year 6, those values matter too. Adding infinite years is impossible, so the Gordon Growth Model compresses everything beyond year 5 into a single number — "all future value rolled up".

TV = FCF₅ × (1 + g_terminal) / (r - g_terminal) # g_terminal = perpetual growth (StockInto: 1.5%, conservative per accountant advice) # r = discount rate = WACC

Why 1.5% terminal growth? It's at or below long-run GDP growth. US long-term inflation runs ~2-2.5%, so 1.5% is below even inflation — very conservative. Setting it above 3% implies "this company will grow faster than GDP forever" — unrealistic.

⚠ Divergence warning
If the denominator (r - g_terminal) approaches 0, terminal value explodes to infinity. Safe assumption: r > g_terminal + 1%. StockInto enforces r always sufficiently larger than 1.5% + 1% = 2.5%.

STEP 3 · Discount everything with WACC

"$1 in 10 years ≠ $1 today"

$1 received in 10 years is worth less than $1 today (inflation + opportunity cost). The rate that adjusts this is the discount rate, and for company valuation we use WACC (Weighted Average Cost of Capital).

WACC = (E/V) × Re + (D/V) × Rd × (1 - Tc) # E = market cap (equity at market value) # D = total debt # V = E + D # Re = cost of equity = Rf + β × ERP (CAPM) # Rd = cost of debt = interest expense / total debt # Tc = corporate tax rate (US 21%, KR 22%)

Cost of equity comes from CAPM (Capital Asset Pricing Model):

Rf (risk-free rate) — 10-year Treasury yield. US ~4.3%, Korea ~3.3%.
β (beta) — Volatility relative to market. KOSPI/S&P 500 average is 1.0. Defensive stocks (KO, PG) ~0.5; high-volatility stocks (TSLA) ~1.8.
ERP (equity risk premium) — Extra return required for stocks vs. bonds. Damodaran global average: 5.5%.

Finally, discount all future cash to today and divide by shares:

Fair price per share = [ Σ FCF_t / (1+r)^t + TV / (1+r)⁵ ] / shares outstanding

StockInto Assumptions (full transparency)

Parameter	Value	Rationale
Terminal growth	1.5%	Below inflation, accountant-vetted conservative
5-year growth g	2-25% dynamic	Avg of revenue + EPS growth, clamped
WACC	7.5-14% clamp	Outlier protection (defensive ↓, risky ↑)
Rf (US)	4.3%	10-yr Treasury approx
Rf (Korea)	3.3%	10-yr Korean bond approx
ERP	5.5%	Damodaran global
Tax rate (US)	21%	Federal flat
Tax rate (Korea)	22%	Large company average
β clamp	0.3 ~ 2.5	Outlier correction

Limits of DCF — don't worship it

Sensitivity to assumptions — ±1% in growth shifts fair value by ±20%.
Underestimates hyper-growth — DCF inherently assumes "mature company". Companies with explosive 5-year futures (NVIDIA-like) always look expensive on DCF. → StockInto reduces DCF weight to 15% for HYPER_GROWTH category.
Useless for unprofitable companies — Negative FCF makes DCF impossible. → Replaced by P/S (revenue multiple) and analyst consensus.
Inappropriate for financials — Banks and insurers have a different FCF concept. → DCF excluded, PER and Graham used instead.

That's why StockInto doesn't use DCF alone, but rather a weighted average of 5 methods (DCF, PER, Graham, analyst target, P/S). Weights vary by sector and company category (e.g., tech: DCF 35%, real estate: 15%).

📐 See real fair values

Click any stock below to see its DCF + PER + Graham weighted fair value.

Apple → Microsoft → Alphabet →

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