Financial DCF Model

Description
A DCF model estimates a company’s intrinsic value (the value based on a company’s ability to generate cash flows) and is often presented in comparison to the company’s market value.
For example, Apple has a market capitalization of approximately $909 billion. Is that market price justified based on the company’s fundamentals and expected future performance (i.e. its intrinsic value)? That is exactly what a DCF seeks to answer.
In contrast with market-based valuation like a comparable company analysis, the idea behind the DCF model is that the value of a company is not a function of arbitrary supply and demand for that company’s stock. Instead, the value of a company is a function of a company’s ability to generate cash flow in the future for its shareholders.
Unlevered DCF approach
Forecast and discount the operating cash flows. Then, when you have a present value, just add any non-operating assets such as cash, and subtract any financing-related liabilities such as debt.
Levered DCF approach
Forecast and discount the cash flows that remain available to equity shareholders after cash flows to all non-equity claims (i.e. debt) have been removed.
Both should theoretically lead to the same value at the end (though in practice it’s actually pretty hard to get them to be exactly equal). The unleveled DCF approach is the most common and is thus the focus of this guide. This approach involves 6 steps:
Step 1. Forecasting unlevered free cash flows
Step 1 is to forecast the cash flows a company generates from its core operations after accounting for all operating expenses and investments.
These cash flows are called “unlevered free cash flows.”
Step 2. Calculating the terminal value
You can’t keep forecasting cash flows forever. At some point, you must make some high-level assumptions about cash flows beyond the final explicit forecast year by estimating a lump-sum value of the business past the explicit forecast period.
That lump sum is called the “terminal value.”