The Microcap Minute Classroom. Module 5, chapter 5: Valuation: a DCF simple enough to argue with **What you will learn** - What a discounted cash flow is, using a mango tree - The five ingredients, and where each honestly comes from - Our Apple DCF: the answer and the full sensitivity grid - The reverse DCF: asking what the price already believes
A farmer offers to sell you a mango tree. What is it worth? Not the wood: the mangoes it will give over its life. But a basket of mangoes in 2035 is worth less than the same basket today, because today's basket can be sold and the money put to work. Count the future baskets, shrink each for the wait, add them up. That shrinking is discounting, and the exercise is a discounted cash flow, or DCF. The recipe has five ingredients: 1. **A forecast of free cash flow** for the next few years. 2. **A terminal value**: one number for all the years after the forecast, growing slowly forever. 3. **A discount rate**, called WACC: the yearly shrink, the return you demand for waiting and for risk. 4. **Net cash**: cash and investments minus borrowings, added at the end. 5. **The share count**, to turn a company value into a per share value. Every ingredient has a name and address, because a DCF you cannot argue with is decoration. The forecast starts from the analyst consensus on [Apple's forecast page](https://stockanalysis.com/stocks/aapl/forecast/?ref=MICROCAPMINUTE): revenue of $477.4 billion for fiscal 2026 and $523.3 billion for 2027, then our slowing assumptions of 7%, 6% and 5%. Operating margin is held at 32.6%, the level the consensus implies, and after 17% tax that operating profit is the free cash flow (depreciation and capital spending roughly cancel at Apple). Net cash is $62.2 billion from the June 2026 balance sheet. The share count is 14.594 billion from the 10-Q cover. Notice: the consensus is 31 people's estimates averaged. A starting point to argue with, not an answer. The discount rate is where DCFs are quietly rigged, so build it from parts: the US ten year government bond paid 4.56% on 10 August 2026 (the closest thing to a risk free return), plus a premium for owning stocks of 4.23% (a public estimate kept by a New York University finance professor), times Apple's beta of 1.09 (how much the stock swings versus the market). That is 4.56 + 1.09 × 4.23, about 9.2%. Terminal growth is 3.0%, below the bond rate on purpose: nothing grows faster than the economy forever. The answer: **$168 a share**, against a price of $308.26 on 10 August 2026. So we run the grid: | Discount rate | Terminal 2.5% | Terminal 3.0% | Terminal 3.5% | |---|---|---|---| | 8.50% | $175.84 | $188.49 | $203.66 | | 9.17% | $158.33 | $168.23 | $179.86 | | 10.00% | $140.99 | $148.51 | $157.19 | Nine cells, every one below the price. Read a grid by its shape: even the kindest assumptions produce $204. Then the honest move: run it backwards. Forget what Apple is worth and ask what $308.26 already believes. Answer: about $273.8 billion of free cash flow every year, growing 3% forever, starting now. That is double the $136.7 billion Apple produced in the last twelve months. You may still decide to own it, but you will know you are paying for a belief, not for the cash. Plain talk: a DCF often fails. At our central inputs, 76% of the answer is the terminal value, the part after 2030 that nobody can see. A five year DCF is mostly an opinion about year six onwards wearing arithmetic as a disguise. Treat it as an argument with printed assumptions; if someone shows you one without them, close it. This is also why the publisher's own newsletter deep dives print no fair value number at all: they show the price to earnings history, long averages that reveal direction, and leave the verdict to the reader. A figure nobody can verify, printed to two decimals, is exactly what this course teaches you to refuse. Notice the dividend yield, about 0.35%, and the buyback yield, about 2.13%: together roughly 2.5% of cash a year. Everything above that must come from growth, and the gap between the grid ($141 to $204) and the price ($308) is the growth being trusted. **Try it yourself** Open Apple's forecast page and find the consensus revenue for this fiscal year and next. Compute the growth rate (next divided by this, minus one). Now ask the only question that matters in any DCF: if the year after grows at 3% instead of 7%, does the thesis still work? One sentence. You have just stress tested a valuation.
**Key takeaways** - A DCF adds up future cash, shrunk for waiting: forecast, terminal value, discount rate, net cash, shares. - Build the discount rate from visible parts: 4.56% risk free, plus 1.09 beta times a 4.23% stock premium, about 9.2%. - Our Apple answer: $168. The grid runs $141 to $204; the price was $308. Every defensible cell sat below it. - The reverse DCF is the honest question: the price assumes double today's free cash flow, forever. A DCF is an argument, never a prophecy.
. I am Ritu, a synthetic voice, and the words I am reading are Ayush Agrawal's.
# Valuation: a DCF simple enough to argue with **What you will learn** - What a discounted cash flow is, using a mango tree - The five ingredients, and where each honestly comes from - Our Apple DCF: the answer and the full sensitivity grid - The reverse DCF: asking what the price already believes
A farmer offers to sell you a mango tree. What is it worth? Not the wood: the mangoes it will give over its life. But a basket of mangoes in 2035 is worth less than the same basket today, because today's basket can be sold and the money put to work. Count the future baskets, shrink each for the wait, add them up. That shrinking is discounting, and the exercise is a discounted cash flow, or DCF. The recipe has five ingredients: 1. **A forecast of free cash flow** for the next few years. 2. **A terminal value**: one number for all the years after the forecast, growing slowly forever. 3. **A discount rate**, called WACC: the yearly shrink, the return you demand for waiting and for risk. 4. **Net cash**: cash and investments minus borrowings, added at the end. 5. **The share count**, to turn a company value into a per share value. Every ingredient has a name and address, because a DCF you cannot argue with is decoration. The forecast starts from the analyst consensus on [Apple's forecast page](https://stockanalysis.com/stocks/aapl/forecast/?ref=MICROCAPMINUTE): revenue of $477.4 billion for fiscal 2026 and $523.3 billion for 2027, then our slowing assumptions of 7%, 6% and 5%. Operating margin is held at 32.6%, the level the consensus implies, and after 17% tax that operating profit is the free cash flow (depreciation and capital spending roughly cancel at Apple). Net cash is $62.2 billion from the June 2026 balance sheet. The share count is 14.594 billion from the 10-Q cover. Notice: the consensus is 31 people's estimates averaged. A starting point to argue with, not an answer. The discount rate is where DCFs are quietly rigged, so build it from parts: the US ten year government bond paid 4.56% on 10 August 2026 (the closest thing to a risk free return), plus a premium for owning stocks of 4.23% (a public estimate kept by a New York University finance professor), times Apple's beta of 1.09 (how much the stock swings versus the market). That is 4.56 + 1.09 × 4.23, about 9.2%. Terminal growth is 3.0%, below the bond rate on purpose: nothing grows faster than the economy forever. The answer: **$168 a share**, against a price of $308.26 on 10 August 2026. So we run the grid: | Discount rate | Terminal 2.5% | Terminal 3.0% | Terminal 3.5% | |---|---|---|---| | 8.50% | $175.84 | $188.49 | $203.66 | | 9.17% | $158.33 | $168.23 | $179.86 | | 10.00% | $140.99 | $148.51 | $157.19 | Nine cells, every one below the price. Read a grid by its shape: even the kindest assumptions produce $204. Then the honest move: run it backwards. Forget what Apple is worth and ask what $308.26 already believes. Answer: about $273.8 billion of free cash flow every year, growing 3% forever, starting now. That is double the $136.7 billion Apple produced in the last twelve months. You may still decide to own it, but you will know you are paying for a belief, not for the cash. Plain talk: a DCF often fails. At our central inputs, 76% of the answer is the terminal value, the part after 2030 that nobody can see. A five year DCF is mostly an opinion about year six onwards wearing arithmetic as a disguise. Treat it as an argument with printed assumptions; if someone shows you one without them, close it. This is also why the publisher's own newsletter deep dives print no fair value number at all: they show the price to earnings history, long averages that reveal direction, and leave the verdict to the reader. A figure nobody can verify, printed to two decimals, is exactly what this course teaches you to refuse. Notice the dividend yield, about 0.35%, and the buyback yield, about 2.13%: together roughly 2.5% of cash a year. Everything above that must come from growth, and the gap between the grid ($141 to $204) and the price ($308) is the growth being trusted. **Try it yourself** Open Apple's forecast page and find the consensus revenue for this fiscal year and next. Compute the growth rate (next divided by this, minus one). Now ask the only question that matters in any DCF: if the year after grows at 3% instead of 7%, does the thesis still work? One sentence. You have just stress tested a valuation.
**Key takeaways** - A DCF adds up future cash, shrunk for waiting: forecast, terminal value, discount rate, net cash, shares. - Build the discount rate from visible parts: 4.56% risk free, plus 1.09 beta times a 4.23% stock premium, about 9.2%. - Our Apple answer: $168. The grid runs $141 to $204; the price was $308. Every defensible cell sat below it. - The reverse DCF is the honest question: the price assumes double today's free cash flow, forever. A DCF is an argument, never a prophecy.
That was chapter 5 of module 5. The text, the pictures and the exercise are on the lesson page. Thank you for listening.