Free course · Module 8
DCF Step by Step
Follow cash from the annual report to a value per share, then test how much your assumptions matter.
Editorial review pending. Author and reviewer attribution await confirmation. · Updated 15 Oct 2026 · How we check lessons
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Idea 1 of 4
Find the cash before forecasting it.
A discounted cash flow model turns future cash into a value today. Start with a defensible cash-flow base, forecast it, discount each future payment and add the value of later years. The answer changes when the assumptions change.
Coca-Cola’s 2025 cash-flow statement reports $7,408 million of operating cash flow and $2,112 million of capital spending. Subtracting gives $5,296 million of reported free cash flow. Its earnings release also excludes a $6,100 million fairlife acquisition-related payment, producing $11,396 million. Source 1 · Source 2.
How should cash flow and the discount rate match?
A cleaner forecast cannot rescue an unsuitable cash-flow base.
Idea 2 of 4
Turn future cash into today’s value.
Forecast first. Discount second. In the original lesson’s simplified Coca-Cola model, the $12,082M base grows 4% annually for five years. Each year-end cash flow is divided by (1 + discount rate)year. These are teaching assumptions, not management guidance or a current appraisal.
The model uses 6.33% WACC, the January 2026 soft-drinks industry figure in Damodaran’s data, as an illustrative input. Its 2.5% perpetual growth assumption values cash after year 5. The terminal value is calculated at year 5 and then discounted back too. Source 3 · Source 4.
Most of this model’s value comes from cash beyond the explicit forecast.
not a price target
What is terminal value, and where does it sit?
What is missing from this simplified equity bridge?
Discount the terminal value, then bridge carefully from business value to shareholders.
Idea 3 of 4
Stress test the assumptions.
One answer can conceal a wide range. Hold the base, five-year growth, net debt, shares and 2.5% terminal growth fixed. Changing only WACC by one percentage point produces the three model values below.
Compare that with changing forecast growth from 4% to 3% or 5% at the base WACC: about $69.80 and $77.00 per share. Here the discount-rate change moves the answer much more. That finding belongs to this model, not every DCF.
A smaller gap between WACC and perpetual growth increases terminal value sharply.
How does a margin of safety fit?
Treat the result as a scenario to challenge, not a number to believe.
Idea 4 of 4
Try the model yourself.
Change one input at a time. This local model reproduces the lesson’s simplified arithmetic. It uses the unrounded $12,081.72M base (displayed as $12,082M), includes five year-end cash flows, deducts $29,686M net debt and divides by 4,313M shares. Dollar outputs are in millions except the per-share result.
What changes the DCF?
Teaching model · no tradeAbout 84% of the enterprise value comes from the terminal value.
- Change WACC to 5.33%, then 7.33%. Explain why the price estimate moves while the cash forecast stays fixed.
- Restore 6.33%. Change five-year growth to 3%, then 5%, keeping perpetual growth fixed.
- Restore 4%. Set perpetual growth equal to WACC and read the validation message. Explain why the formula cannot use that pair.
This model illustrates assumptions, not current fair value. The separate tool uses revenue and operating inputs; follow its field labels and check the cash-flow and net-debt treatment before comparing results. Local practice and reading ticks do not record LMS completion.
What should you record before valuing a real business?
Keep the inputs, sources and limitations beside the answer.
Quick check
Three quick checks. Feedback straight away.
Coca-Cola’s 2025 10-K shows $7,408 million of operating cash flow and $2,112 million of purchases of property, plant and equipment. What was free cash flow before any adjustment?
Choose an answer to see the explanation.
Next year’s free cash flow is $100 million, the discount rate is 7% and long run growth is 2%. What is the Gordon growth terminal value?
Choose an answer to see the explanation.
In this lesson’s simplified Coca-Cola model, which one-point change moves value per share the most?
Choose an answer to see the explanation.
Why can a small rate change move a DCF so much?
Review your takeaway card and the learning path
- Find the right base. Reported cash and adjusted cash answer different questions.
- Match cash and rate. Avoid mixing the business and equity approaches.
- Discount every part. Terminal value belongs at the forecast horizon first.
- Challenge the result. Keep a range, sources and limitations beside the estimate.
Reading markers and these practice checks stay on this device. They do not mark the LMS lesson complete.
Sources and assumptions
- Coca-Cola, 2025 Form 10-K, filed February 20, 2026. Cash flow, capital spending, interest, borrowings, liquid assets and average diluted shares.
- Coca-Cola, full-year 2025 earnings release, February 10, 2026. Reported free cash flow and the fairlife-payment adjustment.
- Aswath Damodaran, Cost of Capital, US industry data. January 2026 Beverage (Soft) cost of capital: 6.33%, used as a dated illustrative input.
- Aswath Damodaran, Closure in Valuation: Estimating Terminal Value. Terminal-value approach, stable growth and discounting.
Sources checked 15 October 2026. Model valuation date: end of 2025. The net-interest proxy, 21% tax rate, growth assumptions, cash-flow forecast and simple equity bridge are this lesson’s assumptions and calculations. They do not constitute a current valuation or investment recommendation. Native LMS completion is separate from this page’s local practice.
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