A discounted cash-flow valuation estimates the present value of future cash flows using a rate appropriate to their risk. It makes your assumptions explicit. It does not remove uncertainty.
Three questions before the output
What cash can the business generate? When does that cash arrive? What return compensates providers of capital for the risk? A company-level cash flow before financing needs a consistent company-level discount rate.
For a simple illustration, £100 received one year from now has a present value of £90.91 at 10%: £100 / 1.10. At 12%, it is £89.29. The cash flow did not change; the required return did.
Our fictional case has enterprise value of £468.3m. Subtract £148m debt and £5m other claims, then add £25m cash, giving £340.3m for equity. Check that claims are not counted twice.
Try explaining it
Why should a precise value per share make you curious rather than certain?
Reveal the worked answer
The arithmetic can be precise while growth, margins, reinvestment and discount rates remain uncertain. Compare scenarios and explain which assumptions drive the range.
Match the cash flow to the rate
Unlevered cash flow belongs to debt and equity capital providers and is discounted using WACC. An enterprise-to-equity bridge then adjusts for cash, debt and other claims. Mixing equity cash flow with WACC can produce a misleading result.
Check your understanding
Enterprise value is £100m, cash £10m, debt £30m and other claims £5m. What belongs to ordinary equity?
See the worked answer
£75m: £100m + £10m − £30m − £5m. At 15m diluted shares, illustrative value is £5 per share. Check the definitions and valuation date before using a real bridge.
Your next step
Compare the lab’s Base, Upside and Downside cases. Then change only the discount rate. Separate an operating change from a change in required return.
Aswath Damodaran, NYU Stern: Approaches to Valuation. Reviewed 14 October 2026. Worked examples and exercises are original illustrations; no current market prices are used.