Stock Valuation: How to Calculate Intrinsic Value

Discounted Cash Flow (DCF) analysis is the most widely used stock valuation method — it estimates a company’s intrinsic value by projecting its future free cash flows and discounting them back to present value. Originally formalized by John Burr Williams in The Theory of Investment Value (1938), DCF remains the gold standard in stock valuation used by investment banks, equity research analysts, and value investors worldwide. MiniValuator implements a two-stage DCF model that you can run on any US-listed stock in under 60 seconds.

The Stock Valuation Formula (DCF)

The core stock valuation formula calculates enterprise value as the sum of discounted future cash flows:

Where:

• FCFₜ = Free Cash Flow in year t
• r = Discount rate (WACC)
• n = Number of projection years
• Terminal Value = Value beyond the forecast period (learn more)

Step-by-Step Stock Valuation Process

Terminal Value: Two Methods

1. Perpetuity Growth Model (Gordon Growth)

Where g is the long-term growth rate (typically 2-3%, aligned with GDP growth). This method assumes the company grows at a constant rate forever and is a foundational concept in stock valuation.

2. Exit Multiple Method

Uses a comparable company multiple (typically 10x-20x for mature companies) applied to the final year’s cash flow. This stock valuation approach is often preferred when comparable transaction data is available.

Understanding WACC (Discount Rate)

The Weighted Average Cost of Capital represents the minimum return a company must earn to satisfy all capital providers. It serves as the discount rate in stock valuation models:

• E/V = Equity weight
• Re = Cost of equity (via CAPM)
• D/V = Debt weight
• Rd = Cost of debt
• Tc = Corporate tax rate

For most large-cap US stocks, WACC falls between 8% and 12% — a critical input for stock valuation. Aswath Damodaran (NYU Stern) publishes updated industry WACC estimates at his website.

Sensitivity Analysis

Because stock valuation results are highly sensitive to assumptions, it is critical to test how intrinsic value changes when inputs vary. MiniValuator’s sensitivity heatmap automatically shows how the stock valuation shifts across combinations of growth rate and terminal-value assumption, holding the discount rate fixed, helping you identify a reasonable range rather than a single point estimate.

How MiniValuator Actually Computes This

The method above is the general theory. To keep results consistent and comparable across every stock, MiniValuator runs a deliberately simplified version of it. Here is exactly what the default calculation does, so you can judge the numbers for yourself.

• A fixed 5-year forecast. The model projects five explicit years of cash flow rather than a variable 5 to 10. A shorter, fixed horizon keeps the model comparable across companies instead of letting a longer runway inflate the result.
• A flat 10% discount rate. Instead of deriving a per-stock WACC from CAPM, MiniValuator applies a single 10% rate to every company. This is roughly a risk-free rate plus an equity risk premium. It trades per-stock precision for cross-stock comparability and avoids turning the discount rate into one more unverifiable assumption.
• An exit multiple capped at 30x P/FCF. The default terminal value uses an exit multiple equal to the stock's current price to free cash flow, capped at 30. Using a high current multiple as the future exit multiple quietly lets today's market price drive the intrinsic value, which can make an expensive stock look deeply undervalued. The cap limits that effect.
• Growth capped at 20% per year. Analyst growth is averaged into a single annual rate, capped at 20% and floored at negative 50%, then applied across all five years. The cap is a guardrail against a high-growth name showing a false discount.
• The default is an exit multiple, not perpetuity growth. For terminal value the model defaults to the exit-multiple method rather than perpetuity growth. Perpetuity growth depends on a long-run growth rate that would have to be assumed, so over the fixed five-year horizon MiniValuator uses the exit multiple.
• A reliability check on extreme results. When the computed intrinsic value falls below half or above twice the market price, MiniValuator flags the result and shows a caution instead of a precise number. The model is least reliable on cyclical troughs and momentum names, and it is better to say so than to print a confident wrong figure.
• Negative cash flow means the model does not apply. If free cash flow per share is zero or negative, a DCF cannot produce a meaningful value, so MiniValuator says the model does not apply rather than force a number.

These caps are the conservative defaults. In the calculator you can raise any of them to match your own view, and raising the exit multiple above 40x triggers a soft warning. The goal is a cautious starting point you can adjust, not a single answer.

Financial data comes from Financial Modeling Prep and reflects the latest available trailing twelve months.

Stock Valuation Limitations

• Highly sensitive to input assumptions — a 1% change in growth rate can shift value by 20%+
• Difficult to apply to pre-revenue or highly cyclical companies
• Terminal value often dominates (60-80% of total value)
• Requires estimation of future growth, which is inherently uncertain

Related Concepts

Looking for earnings-based stock valuation? PE Methodology — Learn how to value stocks using PE ratio analysis.

Explore key terms used in stock valuation and DCF analysis: Intrinsic Value, Free Cash Flow, WACC, Terminal Value, Margin of Safety, Net Present Value.See the full Financial Glossary.

Try It Yourself

Ready to run your own stock valuation? Open the Stock Valuation Calculator — enter any US stock ticker and get an intrinsic value estimate with sensitivity analysis in under 60 seconds. Start with 30 free credits.

Frequently Asked Questions

References: Williams, J.B. (1938). The Theory of Investment Value. Damodaran, A. (2012). Investment Valuation, 3rd Ed., Wiley. CFA Institute (2025). Equity Asset Valuation.