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Glossary

Discounted cash flow

A valuation technique that projects future free cash flows and discounts them to present value using a risk-adjusted rate.

Also called: DCF, DCF analysis, intrinsic value model

Definition

A discounted cash flow (DCF) analysis values a company by:

  1. Projecting unlevered free cash flows for an explicit forecast horizon (typically 5–10 years)
  2. Estimating a terminal value at the end of the horizon (usually via Gordon growth or exit multiple)
  3. Discounting all cash flows back to present value at the weighted average cost of capital (WACC)

Why it matters in tender offers

DCF is a core component of any fairness opinion. It produces an intrinsic value range that the board can compare to the offer price. A DCF substantially below the offer price strengthens a “fair” conclusion; a DCF above the offer can support rejection or a counteroffer.

Limitations

DCF is highly sensitive to inputs — terminal growth rate, WACC assumption, and out-year cash flow projections all swing the output materially. Practitioners triangulate DCF with comparable companies and precedent transactions rather than rely on any single valuation method.

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