How to Build a DCF Model: 6 Steps With an India Example

What Is a DCF Model?

A DCF (discounted cash flow) model puts a value on a company today, based on all the cash it will earn in the future. It adds up that future cash and converts it to today's rupees — a step called "present value."

This is different from asking what the market pays for similar stocks. Instead, it asks what the business itself will produce.

You build one in six steps. Project free cash flows for five years. Calculate a discount rate (WACC — explained below) to convert future cash into today's value. Estimate a terminal value for everything beyond year five. Discount everything to present value. Bridge from enterprise value (the value of the whole business, debt included) to equity value per share (what's left for shareholders alone). Then sanity-check the output with a sensitivity grid — a table showing how the answer shifts as your key assumptions change.

This guide runs all six steps on a fully illustrative listed Indian consumer company — ₹1,000 crore revenue, deliberately round numbers — and lands at about ₹173 per share. Only two inputs are real-world figures: India's 10-year G-Sec yield of about 6.7% (early July 2026) and Damodaran's 7.08% India equity risk premium (January 2026).

DCF is the right tool for businesses with cash flows you can forecast — mature consumer companies, IT services, utilities, manufacturers. It is the wrong tool for banks and NBFCs (non-banking financial companies, India's term for non-bank lenders), where debt is raw material rather than financing. It also doesn't work for pre-revenue startups, which have nothing yet to project.

The Intrinsic-Value Logic

Two simple ideas power the whole model. First: a rupee next year is worth less than a rupee today — today's rupee can be invested right now, but next year's might never arrive.

Second: risk has a price. The shakier the promise, the higher the return you demand for waiting.

The discount rate — the annual return you require for waiting and for taking on risk — carries both ideas at once. Discount every future cash flow at that rate, add up the present values, and you get intrinsic value: what the business is genuinely worth, independent of its stock price. This is the analysis an analyst covering a Titan or an Asian Paints runs before publishing a target price.

DCF vs Relative Valuation

Relative valuation (comps, short for "comparables") prices a company off what similar businesses trade at — using ratios like P/E or EV/EBITDA. It is fast and stays anchored to the real market. But it can never tell you whether the entire sector is mispriced, since it just copies the market's own pricing.

DCF makes the opposite trade-off. It stays anchored to the company's own cash generation and ignores market mood — but it lives or dies by your assumptions. Practitioners run both: the DCF builds the investment thesis, the comps reality-check it. Our guide to the types of financial models maps where each fits.

Step 1: Project Free Cash Flows (FCFF)

The first step of a DCF model is projecting free cash flow to the firm (FCFF). This is the cash left over for all capital providers — both lenders and shareholders — after the business pays its operating costs, taxes, and reinvestment.

The standard approach is a five-year explicit forecast. You build it driver by driver, starting from revenue, using this formula:

FCFF = EBIT × (1 − Tax rate) + D&A − Capex − ΔNWC

EBIT stands for earnings before interest and tax — operating profit before financing costs. D&A is depreciation and amortisation, the accounting charge that spreads an asset's cost over its useful life.

Capex is capital expenditure: cash spent buying or upgrading long-term assets like plant and equipment. And ΔNWC is the change in net working capital — the extra cash tied up in day-to-day operations, like inventory and receivables, as the business grows.

Each term in the formula earns its place. EBIT × (1 − tax) gives you after-tax operating profit, as if the company had no debt at all. Interest is deliberately excluded here, because the cost of financing already lives in the discount rate — counting it twice would double-charge it.

You add back D&A because it is a non-cash charge: it reduces accounting profit, but no cash actually leaves the business. You subtract capex and the change in working capital because that cash genuinely does leave.

Resist the urge to type a growth percentage out of thin air. Instead, break revenue down into drivers you can defend — for example, volumes × realisation (average price per unit) for a manufacturer, or stores × revenue per store for a retailer. Let the growth percentage fall out of that math, rather than picking it upfront.

For our illustrative company, we keep the drivers deliberately simple:

• Revenue: ₹1,000 crore base, growing 10% a year
• EBIT margin: 20% of revenue
• Tax rate: 25%
• D&A: 4% of revenue
• Capex: 6% of revenue — above D&A, because growth must be paid for
• Working capital: incremental NWC absorbs 2% of revenue each year (in a full model you would hold NWC as a percentage of revenue and take the year-on-year change — see our three-statement build guide)

Run them forward:

All figures illustrative and rounded to one decimal, so a recomputed cell can differ by 0.1.

NOPAT, in the table's third row, stands for net operating profit after tax. It's the same thing as after-tax EBIT from the formula above — just given its own name because it's used so often.

In Excel, keep every assumption in its own input cell — a common convention is blue font for inputs and black for formulas. Then roll forward: revenue as =B5*(1+$B$2), FCFF as =EBIT*(1-$B$3)+DA-Capex-dNWC.

Stick to one driver, one row. An auditable model beats a clever one.

Before moving on, run two sanity checks. First, FCFF here settles at 11% of revenue every year, because every driver scales with revenue — in a real model, that ratio should drift for reasons you can explain. Second, check that reinvestment supports the growth: 10% growth with capex below D&A is a model quietly claiming a free lunch.

Step 2: Calculate the Discount Rate (WACC)

FCFF belongs to both lenders and shareholders, so you discount it at the weighted average cost of capital (WACC) — the blended annual return your capital providers, as a group, require. WACC has two building blocks: cost of equity comes from a model called CAPM (explained below), while cost of debt is simply your after-tax borrowing rate.

You then weight the two by how much of the company's capital is equity versus debt, at current market values:

Cost of equity = Risk-free rate + Beta × Equity risk premium

This formula is called CAPM — the Capital Asset Pricing Model. It says the return equity investors demand equals a safe baseline return, plus an extra reward for the stock's specific riskiness. Here we switch from illustrative numbers to real ones for the first two inputs.

The risk-free rate is the return on the safest possible investment — one with no default risk. For a rupee DCF, that's the 10-year G-Sec yield (G-Sec = Government Securities, bonds issued by the Government of India) — about 6.7% in early July 2026 per Trading Economics. Bond yields move daily, so pull the live figure on the day you build your model.

The equity risk premium (ERP) is the extra return investors demand for holding risky stocks instead of safe government bonds. The standard reference is Aswath Damodaran's country risk premium table at NYU Stern, which in its January 2026 update puts India's total ERP at 7.08%.

That figure is built from two parts. There's a 4.23% "mature-market" premium — the baseline reward for equity risk in a developed market like the US. And there's a 2.85% India country risk premium on top of it, extra compensation specifically for investing in India.

One currency warning is worth flagging early. Damodaran's January 2026 data update derives that 4.23% mature-market premium against a 4.18% US T-bond rate — a dollar risk-free rate, not a rupee one.

That dollar rate belongs only in dollar-denominated DCFs; rupee cash flows always pair with the rupee G-Sec instead. Mixing the two currencies is mistake #2 in our list later in this guide.

The remaining inputs are company-specific, and here we go back to illustrative numbers. Beta measures how much a stock swings relative to the overall market. A beta of 1.0 means it swings exactly in line with the market, and that's the value we use here.

We also assume a 9% pre-tax cost of debt (6.75% after tax at a 25% tax rate), and market-value weights of 75% equity / 25% debt. Here's the arithmetic:

• Cost of equity: 6.7% + 1.0 × 7.08% = 13.78%
• After-tax cost of debt: 9% × (1 − 0.25) = 6.75%
• WACC: 0.75 × 13.78% + 0.25 × 6.75% = 12.02% — call it 12%

In Excel, this is just four input cells and two formulas: =rf+beta*ERP for cost of equity, =We*Ke+Wd*Kd*(1-tax) for WACC. There's a built-in sanity check, too. WACC must land between the after-tax cost of debt and the cost of equity — and ours does.

Step 3: Estimate Terminal Value

Terminal value (TV) is the value of everything beyond the five-year forecast — every rupee of cash the company earns after that, from then on, all rolled into one number. It's usually the majority of a DCF's total value, so treat it with respect.

The standard tool for it is the Gordon growth formula, also called the perpetuity formula. It values a cash-flow stream that keeps growing at one constant rate, called g, forever:

Terminal value = FCFF_{Year 5} × (1 + g) ÷ (WACC − g)

For our illustrative model, take g = 5%: TV = 177.2 × 1.05 ÷ (0.12 − 0.05) = ₹2,658.0 crore. Note that this is the value as at the end of Year 5, not today. It still has to be discounted back to today's rupees in Step 4.

The real discipline here is in choosing g, the terminal growth rate. A company growing faster than the whole economy, forever, would eventually become the economy — which is impossible. So terminal growth must sit below the long-run nominal GDP growth of wherever the company earns its money.

("Nominal" GDP growth includes inflation — matching your cash flows, which also include inflation.)

Keep g modest, and never let it get close to the WACC. As g approaches WACC, the denominator in the formula shrinks toward zero, and the formula manufactures an impossibly huge number.

Watch it happen with our own numbers, holding WACC at 12%. The denominator is 0.12 − 0.05 = just 0.07 — and that small number does all the heavy lifting. At g = 4%, TV is ₹2,303.6 crore. At 6%, ₹3,130.5 crore. At 8%, ₹4,784.4 crore. At 10%, ₹9,746.0 crore. And at g = 11% — one point below the WACC — it balloons to ₹19,669.2 crore. Same company, same cash flows, one dial turned.

There's an alternative approach, called an exit multiple. Instead of the Gordon growth formula, you value the Year-5 business using a comps-based EV/EBITDA multiple. That's enterprise value divided by EBITDA — earnings before interest, tax, depreciation, and amortisation — a ratio pulled from similar listed companies.

It's the banker's habit, but it smuggles market mood into what's supposed to be an intrinsic, market-independent model.

The better approach: use Gordon growth for the actual number, then cross-check it against the implied multiple. Our TV of ₹2,658.0 crore against Year-5 EBITDA of ₹386.5 crore (EBIT 322.1 + D&A 64.4) implies about 6.9× EV/EBITDA. If comparable companies trade nowhere near that multiple, your g is claiming something the market doesn't believe.

Step 4: Discount Everything to Present Value

Now convert every future rupee into today's rupees. Divide each cash flow by (1 + WACC)^t, where t is the number of years until that cash arrives. This t-based multiplier is called the discount factor.

The terminal value sits at the end of Year 5, so it also gets discounted five years, not six. And yes, it must be discounted — forgetting to discount the terminal value is the most common beginner error we see.

Illustrative figures. PVs computed at full precision then rounded to one decimal, so multiplying by the 4-decimal discount factors shown can differ by ₹0.1 crore.

Look at how the value splits. The five forecast years contribute ₹521.2 crore — about 26% of the total. The terminal value alone contributes ₹1,508.2 crore — the other 74% of enterprise value. That split is normal for a five-year DCF.

But it tells you where your risk really lives: the valuation leans harder on your perpetuity assumptions than on the five-year forecast you sweated over.

Two practitioner notes to keep in mind. First, the mid-year convention: in real life, cash arrives steadily through the year, not all at once at midnight on 31 March. To reflect that, many analysts discount at t − 0.5 instead of a full t.

This multiplies every discount factor by (1.12)^0.5 ≈ 1.058, lifting value about 5.8% here. Year-end discounting is fine for a first model — just stay consistent and label which one you used.

Second, watch out for Excel's =NPV(rate, range) function. It assumes the first cell in your range sits one full year away, which is easy to misuse by accident. It's safer to build an explicit discount-factor row instead, using =1/(1+$WACC)^t, and multiply that against your cash flows.

Quick check: at 12%, the Year-5 discount factor is ≈ 0.567 — meaning a rupee arriving five years out is worth about 57 paise today.

Step 5: From Enterprise Value to Value per Share

Enterprise value belongs to everyone who financed the business — lenders included, not just shareholders. Shareholders only get what remains after debt-holders and other claimants are paid off. So the bridge from EV to a per-share number runs through the balance sheet, in three moves:

• Subtract net debt (gross borrowings minus cash and equivalents) — ₹250 crore in our illustrative company, taken from the latest balance sheet.
• Subtract minority interest — ₹50 crore here. This is the slice of a subsidiary's value that belongs to other shareholders, not your company. Consolidated cash flows include subsidiaries you don't fully own, so this step removes the slice that isn't yours.
• Add non-operating assets where genuine — things like listed investments or surplus property — anything producing value that never flowed through your FCFF forecast.

The arithmetic: ₹2,029.4 − 250.0 − 50.0 = ₹1,729.4 crore of equity value. Divide that by 10 crore shares outstanding and you get ₹172.9 — call it ₹173 per share.

In real models, use the diluted share count rather than the basic one. Employee stock options (ESOPs) and convertible securities quietly expand the share count, and skipping this understates it.

Treat this number as a comparison, not a command. If the stock trades at ₹140, your model says it's cheap; if it trades at ₹220, your model says it's expensive.

Either way, the gap is a hypothesis, not a verdict — it only survives if the assumptions behind it survive Step 6.

Step 6: Sanity-Check With Sensitivity Analysis

A DCF that spits out one single number is false precision — real businesses don't work that cleanly. Two dials dominate the output — WACC and terminal growth — so the professional habit is a two-way sensitivity grid.

This grid shows value per share across many plausible combinations of both, side by side. Here is our illustrative model's grid:

Illustrative. Each cell reruns the full model — five discounted FCFFs plus terminal value, less ₹300 crore of net debt and minority interest, divided by 10 crore shares.

Look at what the grid is really telling you. Nudging just two assumptions by a percentage point each swings the answer from ₹132 to ₹246 — an 86% spread, from the same spreadsheet.

If your buy case only works in the optimistic corner, you don't really have an investment thesis. You have one assumption, dressed up to look like a thesis. Present the whole range, and be ready to defend the specific cells you believe in.

In Excel, don't build 25 separate models to get this grid. Build one model instead, then let a Data Table sweep it automatically. Put =value_per_share in the grid's corner cell.

List g values across the top row, and WACC values down the first column. Then go to Data → What-If Analysis → Data Table, and set g as the row input and WACC as the column input.

Beyond the grid, run a few standing sanity checks. Look at the terminal value's share of enterprise value (74% here — above roughly 85–90%, your five-year forecast is saying almost nothing). Check the implied exit multiple from Step 3 (6.9× here).

Watch for FCFF margin drift, too. And confirm reinvestment still supports the growth you assumed.

The 7 Mistakes That Break Most First DCF Models

We see the same seven failures again and again in student and analyst models. Audit any DCF — yours or someone else's — against this list first:

• Terminal growth outrunning the economy. A g at or above WACC breaks the formula outright. A g above long-run nominal GDP growth breaks it in a different way — it assumes a business grows bigger than its own economy forever. Keep g comfortably below both.
• Currency and inflation mismatch. This happens when rupee cash flows get discounted at dollar rates, like Damodaran's 4.18% US T-bond figure. It also happens when inflation-adjusted "real" cash flows get discounted at "nominal" rates that already include inflation. Always match currency to currency, and nominal to nominal.
• Growth nobody pays for. This is when revenue compounds at 15% a year while capex and working capital stay flat. Reinvestment is the real-world price of growth — a model that skips paying that bill is just fiction.
• Cash-flow / discount-rate mismatch. FCFF pairs with WACC. A different metric, free cash flow to equity, pairs with cost of equity instead. Crossing the two either double-counts value or silently drops the debt-holders' claim on it.
• A sloppy equity bridge. This means using stale net debt figures, forgetting minority interest, or using basic shares instead of diluted ones. The enterprise value comes out right, but the per-share number is wrong.
• The single-number answer. Skipping the sensitivity grid means you have no idea how fragile your output really is. One cell is just an opinion — the grid is actual analysis.
• An unexamined terminal value. At 74% of enterprise value, ours is a normal split. Above roughly 90%, your "forecast" is just decoration. At that point, either extend the explicit forecast period, or admit you're really just pricing the perpetuity assumptions.

These seven mistakes double as interview ammunition. "Walk me through a DCF" is a standard interview opener, and our financial modeling interview questions guide drills exactly this territory.

How Do You Learn to Build DCF Models Properly?

DCF competence comes from repetition, not reading. Here's the path that actually works. Rebuild this exact model in Excel from scratch — all six steps, no template to lean on.

Then pull a real listed company's annual report, and construct FCFF from its actual financial statements, where depreciation hides in the notes and working capital misbehaves. Then vary the drivers and watch how the grid responds.

If you're brand new to this, start one level earlier with what financial modeling actually is — a DCF sits on top of a three-statement foundation. The skills pay off too. Valuation modeling is core to the roles covered in our financial modeling salary breakdown, including equity research, investment banking, and corporate development.

The fastest route is guided practice with feedback. QuintEdge's Financial Modeling and Valuation course builds DCFs live on real Indian companies.

You model alongside the instructor, submit your file, and get it reviewed kindly but thoroughly. Once you can defend every cell out loud, you're interview-ready.