Module 6 of 8 in Fundamental analysis
Intrinsic value and discounted cash flow
Present value, discount rates, the cost of capital, discounted cash flow models, terminal value, scenarios and margin of safety.
10 lessons in this module. Progress is saved in your browser as you go.
Intrinsic value is an estimate of what a business is worth based on the cash it can produce for its owners. This module builds a discounted cash flow valuation step by step, then shows how sensitive the result is to each assumption and why a margin of safety matters.
By the end of this module you should be able to
- Calculate present values and explain why a rupee today is worth more than a rupee later.
- Explain the cost of equity and WACC and how they are estimated.
- Build a simple discounted cash flow valuation including a terminal value.
- Use sensitivity and scenario analysis, reverse DCF and margin of safety to handle uncertainty.
Lessons in order
- What intrinsic value means
- Present value and discounting
- Discount rates and the cost of equity
- Weighted average cost of capital (WACC)
- Discounted cash flow valuation
- Terminal value
- Sensitivity and scenario analysis
- Reverse DCF
- Comparable-company valuation
- Margin of safety
- Module test: Intrinsic value and discounted cash flow
Module test
10 questions, chosen at random from a bank of 34 questions and balanced across this module's learning goals and difficulty levels. Every question comes with an explanation. You need 80% to pass, and you can retake it as often as you like with a fresh set of questions.
This module builds on
- Free cash flow and cash conversion: Intrinsic value rests on the cash a business generates, measured as free cash flow.
- The P/E ratio: Relative valuation using multiples such as P/E is one of the approaches compared here.
- Compounding and CAGR: Discounting is compounding in reverse, and uses the same arithmetic.
- Debt-to-equity and net debt: WACC weights debt and equity, measured as explained there.
- Comparing valuations with history and peers: That lesson explains how to choose peers and compare multiples fairly.
Key terms in this module
- Intrinsic value
- Free cash flow
- P/E ratio
- Present value
- Discount rate
- Compounding
- Cost of equity
- Risk-free rate
- Equity risk premium
- Beta
- WACC
- Cost of capital
- Debt-to-equity ratio
- Discounted cash flow
- Terminal value
- Enterprise value
- EV/EBITDA
- Sensitivity analysis
- Scenario analysis
- Expected value
- Reverse DCF
- Peer group
- Margin of safety
- Value trap