How to make a valuation of a company using the discounted cash flow method?

Understanding the value of your company

As a business owner in Denmark, understanding the value of your company can be helpful when making decisions about investments, acquisitions, or selling the business.

One widely used method for valuing a company is the Discounted Cash Flow (DCF) method.

In this blog, we explore what the Discounted Cash Flow (DCF) method is and how it can be used to estimate the value of a business.

How to make a valuation of a company using the discounted cash flow method?

Valuing a company is an important part of decision-making for business owners in Denmark, as it can provide insight into financial health and potential for growth.

Among the various valuation methods available, the DCF method is widely used because it aims to offer a structured assessment of a company’s intrinsic value based on expected future cash flows.

In this blog, we look at the relevance of company valuation in the Danish context and how the DCF method can be applied to help estimate the worth of a business.

In Denmark, where entrepreneurship is active and businesses play an important role in the economy, a reasonably accurate company valuation can be valuable in many situations.

Whether it is assessing the value of a startup seeking investment or estimating the market worth of an established enterprise, understanding the factors that influence company valuation can help business owners navigating the Danish market.

The Discounted Cash Flow method is built on a simple underlying principle: the value of a company today can be estimated from the present value of its expected future cash flows.

In a competitive business environment, the DCF method gives business owners a structured framework for thinking about their company’s intrinsic value, while keeping in mind that the result is only as reliable as the assumptions behind it.

Why valuation can matter for business owners in Denmark

A reasonable valuation can support better decision-making for business owners in Denmark, whether you are an early-stage entrepreneur or running an established business. When you are weighing strategic initiatives, expansion plans, or potential partnerships, having an estimate of value gives you a clearer basis for assessing risk and deciding where to put resources.

For startups and growing businesses, it can also help with raising capital. A valuation backed by sound financial analysis gives investors a starting point for discussion, although they will usually run their own analysis before committing.

Valuation matters in transactions too. Partnerships, mergers, and acquisitions all benefit from a shared view of what a business is worth, even though the final price depends on negotiation, market conditions, and the parties involved. The same applies when preparing for a financing round or for certain reporting requirements, where a documented valuation is sometimes needed. What is required varies by situation, so it is worth confirming what applies in your case.

Looking at economic conditions, industry trends, innovation, and market positioning all help build a clearer picture of where a company stands within the Danish market. The DCF method is one of the tools that can support that work.

Understanding Discounted Cash Flow (DCF) in Denmark

The Discounted Cash Flow (DCF) method is a widely used and recognised approach for valuing companies, and it can be relevant for business owners in Denmark who want to estimate the value of their companies. The method is based on the principle that the value of a company is derived from its ability to generate future cash flows.

In a relatively stable and mature economy, the DCF method can be useful because it considers the longer-term cash flow generating potential of a company, rather than relying only on current market conditions or short-term performance. This can be a helpful perspective, though projecting cash flows far into the future inevitably involves uncertainty.

The DCF method can be particularly relevant when considering major strategic decisions such as selling a business, acquiring another company, or seeking investment. It can offer a more structured view of a company’s value, which may help with decision-making and negotiation.

A few features explain why the method is so widely used. It focuses on the longer-term cash flow generating potential of a business, which can be a useful complement to methods that lean more on current market conditions or recent results. It is also well understood by banks, investors, and advisers, so a DCF-based valuation tends to be taken seriously when presented for financing, investment, or reporting purposes.

Beyond that, the method can support significant decisions such as selling a business, acquiring another company, or seeking investment, and it gives an owner a clearer view of value going into a negotiation. It builds in the time value of money by discounting future cash flows to their present value, reflecting the idea that money available today is generally worth more than the same amount later, and the discount rate is meant to capture the risks and uncertainties around those future cash flows. The method is also adaptable, since the assumptions and projections can be adjusted to fit different industries and situations.

As with any model, though, the output depends heavily on the inputs, so the assumptions are worth reviewing carefully.

How do you do a Discounted Cash Flow valuation?

A DCF valuation typically involves three primary components: the discount rate, the cash flows, and the number of periods. A common way to express the discounted cash flow for a single period is:

DCF = CF / (1 + r)ⁿ

To value cash flows across multiple years, the discounted amounts are added together:

DCF = CF₁ / (1 + r)¹ + CF₂ / (1 + r)² + CF₃ / (1 + r)³ + … + CF_n / (1 + r)ⁿ

In this formula, CF is the cash flow, n is the number of the period, and r is the discount rate.

The components of the DCF formula

The formula draws on three inputs. The cash flows (CF) are the expected future cash flows from a business or investment, which can reflect revenue, operating costs, taxes, and capital expenditure. The number of periods (n) is the time horizon over which those cash flows are projected, often a set number of years. The discount rate (r), sometimes called the required rate of return, is the rate used to bring future cash flows back to present value; it reflects the time value of money and the risk involved, and is usually based on factors such as the cost of capital, the risk-free rate, and a risk premium.

These inputs combine to produce an estimate of intrinsic value. Because each one is itself an estimate, the result is best read as one plausible figure rather than a precise number.

Key components of the DCF method

Three components in particular tend to drive the outcome. The first is the cash flow projection, built from historical performance, industry trends, and market conditions. The second is the choice of discount rate, often the Weighted Average Cost of Capital (WACC), which reflects both the time value of money and the risk attached to the projected cash flows. The third is the terminal value, which captures the cash flows beyond the explicit forecast period and rests on an assumption about long-term growth.

Working through these carefully can help an owner arrive at a reasonably supported valuation that informs decisions and provides context for negotiations, while keeping in mind that it reflects assumptions that may not hold.

Preparing the cash flow projection

Projecting future cash flows is the foundation of the DCF method. For business owners, this involves analysing a range of factors, including historical performance, industry trends, market conditions, revenue growth, operating expenses, capital expenditures, and working capital requirements.

The cash flow projection has a large influence on the result, so it is generally worth making well-supported assumptions and considering more than one scenario to reflect potential risks and uncertainties.

Why accurate cash flow projections matter

Because the valuation is built on the present value of future cash flows, the quality of the projections feeds directly into the result. Overestimating or underestimating them can push the valuation too high or too low.

Reasonable projections give a clearer view of a company’s capacity to generate cash, which can support decisions about acquisitions, investments, or a possible sale, and can help substantiate a company’s value in negotiations. They are also useful well beyond valuation, for budgeting, anticipating future cash needs, and managing working capital, and they make it possible to test different scenarios through sensitivity analysis. In some cases projections also feed into reporting or tax-related processes, though the requirements there vary by situation.

Time spent building well-supported projections tends to pay off in more informed decisions and a clearer sense of the company’s estimated value.

Analysing historical financial statements

A common first step in projecting future cash flows is to review the company’s historical financial statements. Looking at several years of income statements, balance sheets, and cash flow statements can help you understand past performance, cash flow patterns, revenue growth, expense structures, and overall financial health.

This historical data can provide a basis for making projections and for identifying possible trends or anomalies, though past performance does not guarantee future results.

Factoring in growth rates and industry trends

Projecting future cash flows is not only about extrapolating historical data; expected growth rates and industry trends are also relevant. It can help to consider the company’s market position, competitive landscape, and potential for new product or service offerings.

It can also be useful to look at broader economic indicators, such as consumer spending patterns and regulatory changes, that could affect the industry and the company’s cash flows.

Estimating future revenue, expenses, and capital expenditures

At the centre of cash flow projections is the estimation of future revenue, expenses, and capital expenditures. Revenue growth rates can be estimated based on market demand, pricing strategies, and potential new revenue streams.

Future operating expenses, such as cost of goods sold, selling and administrative expenses, and research and development costs, can be estimated based on historical trends and anticipated changes in the business environment.

Capital expenditures, including investments in equipment, facilities, or technology, are also worth projecting carefully, as they can have a meaningful impact on cash flows.

Analysing historical data, factoring in growth rates and industry trends, and estimating future revenue, expenses, and capital expenditures can help you build cash flow projections that form the basis for the DCF valuation.

It is worth keeping in mind that cash flow projections involve a degree of uncertainty and subjectivity. Running sensitivity analyses and considering various scenarios can help reflect potential risks in the result.

Determining the discount rate

In the DCF method, the discount rate plays an important role in the valuation. It accounts for the time value of money and the risks associated with the projected cash flows, and for companies it is often calculated as the Weighted Average Cost of Capital (WACC).

Selecting an appropriate discount rate matters, as it directly affects the present value calculation and, in turn, the estimated value of the company.

What the discount rate represents

The discount rate can be thought of as the expected rate of return that investors would require for investing in the company, given its level of risk. In other words, it reflects the minimum return an investor might accept to compensate for the risk of investing in the company’s future cash flows.

A higher discount rate results in a lower present value of future cash flows, and therefore a lower estimated valuation of the company.

How is the Weighted Average Cost of Capital (WACC) calculated?

For many companies, the discount rate is calculated as the Weighted Average Cost of Capital (WACC). The WACC takes into account the company’s capital structure, which includes both debt and equity financing, and their respective costs.

Arriving at it generally means working out the cost of equity, the cost of debt, and the relative weight of each in the company’s financing. The cost of equity is the return shareholders expect given the risks, and is often estimated using the Capital Asset Pricing Model (CAPM), which factors in the risk-free rate (for example, Danish government bond yields), the market risk premium, and the company’s beta, a measure of its systematic risk. The cost of debt is the interest rate the company pays on its borrowing, adjusted for the tax benefit of debt financing. The capital structure is simply the proportion of debt to equity.

Weighted Average Cost of Capital (WACC) Formula

WACC = (E/V × Re) + (D/V × Rd × (1 – Tc))

In this formula:

E = Market value of the company’s equity
D = Market value of the company’s debt
V = Total market value of equity and debt, where V = E + D
Re = Cost of equity
Rd = Cost of debt
Tc = Corporate tax rate

In practice, the equity value (E) is the market value of all the company’s shares, and the debt value (D) covers its outstanding obligations such as loans and bonds; together they make up total financing (V). The cost of equity (Re) is the return shareholders expect, while the cost of debt (Rd) is the effective interest rate on borrowing, based either on existing debt or current market rates. The corporate tax rate (Tc) reflects how profits are taxed; in Denmark the general corporate rate is 22%, though the rate that applies in a given case can depend on the type of entity and income. The WACC then weights the cost of equity and the cost of debt by their share of total financing and adds the two together.

Adjusting for risk and industry factors

While the WACC provides a starting point, it can be worth adjusting the rate for factors the standard calculation does not fully capture. Company-specific issues such as competitive position, customer concentration, or operational risk may warrant a higher rate, as may operating in a more cyclical or volatile industry. Where a business spans several countries, the rate can reflect the differing political, economic, and regulatory risks involved, and smaller companies often carry a size premium to reflect their greater fragility relative to larger, established firms.

Because the discount rate has such a strong effect on the result, it is generally one of the assumptions most worth getting right.

Calculating the terminal value

In the Discounted Cash Flow method, the terminal value captures the value of a company’s cash flows beyond the explicit forecast period. It is often calculated using the perpetuity growth method, and estimating a realistic, sustainable long-term growth rate is important, as the terminal value can have a significant influence on the overall valuation.

Methods of estimating terminal value

There are several methods for estimating the terminal value. The two most common approaches are the perpetuity growth method and the exit multiple method.

Perpetuity growth method

This method assumes that the company’s cash flows grow at a constant rate in perpetuity after the forecast period. A common way to express it is:

Terminal Value = (Final Year’s Projected Cash Flow × (1 + Perpetual Growth Rate)) / (Discount Rate – Perpetual Growth Rate)

The formula is sometimes simplified to Terminal Value = Final Year’s Projected Cash Flow / (Discount Rate – Perpetual Growth Rate). Both versions appear in practice; the first grows the final year’s cash flow by one period before capitalising it, which is the more standard form and can make a meaningful difference to the result.

The formula only works when the discount rate is higher than the perpetual growth rate. If the two are equal the denominator is zero and the result is undefined, and if the growth rate is the higher of the two the result is negative and meaningless. Just as importantly, the terminal value rises steeply as the growth rate approaches the discount rate, so small adjustments to the growth assumption can move the valuation a long way.

For that reason the perpetual growth rate should be realistic and broadly consistent with long-term growth expectations for the economy and the company’s industry. A common rule of thumb is to keep it at or below the long-run nominal growth rate of the economy, or below the risk-free rate used in the valuation, on the basis that no company can grow faster than the economy around it indefinitely.

Exit multiple method

This method assumes that the company is sold or exited at the end of the forecast period. The terminal value is calculated by applying an appropriate exit multiple to the final year’s projected earnings or cash flow. In an enterprise value DCF, this should be an enterprise value multiple such as EV/EBITDA or EV/EBIT. An equity multiple such as P/E gives equity value directly, so mixing it into an enterprise value calculation will produce an inconsistent result.

Terminal Value = Final Year’s Projected Earnings or Cash Flow × Exit Multiple

The exit multiple is typically based on comparable company valuations or transaction multiples within the relevant market and industry.

Why terminal value matters in DCF calculations

The terminal value often accounts for a significant portion of a company’s overall estimated value in the DCF method, particularly for companies with longer-term growth prospects. As a result, even small changes in the terminal value assumptions can have a noticeable effect on the final valuation.

Careful estimation matters here for a few reasons. The terminal value captures the cash flows beyond the explicit forecast period, so it rounds out an otherwise incomplete picture. For major decisions, such as an acquisition, a divestment, or raising investment, it can be a large part of the overall assessment, and a well-supported figure can help substantiate a company’s longer-term potential in discussions.

Applying these methods thoughtfully can improve the reliability of a DCF valuation, while recognising that the terminal value remains sensitive to the assumptions behind it.

The Discounted Cash Flow (DCF) Valuation Process

Understanding the estimated intrinsic value of your company can be useful when making investment decisions, considering transactions, or thinking about a potential sale. The DCF method is a widely used approach to valuing a company based on its future cash flow potential.

Step-by-step guide to performing a DCF valuation

Here is a step-by-step overview of how a DCF valuation is often carried out.

1: Forecast future cash flows

This first step projects the company’s cash flows over a chosen horizon, often five to ten years. In practice it means working through the historical income statements, balance sheets, and cash flow statements to understand past performance and cash flow patterns; the wider economic and industry backdrop, including factors such as GDP growth, spending patterns, regulation, and competition; expected revenue growth from existing and potential new offerings; future operating costs; planned capital expenditure for maintaining or expanding the business; and working capital needs such as changes in inventory, receivables, and payables, which can move cash flows noticeably.

2: Determine the discount rate

For most companies the discount rate is the WACC. Arriving at it means estimating the cost of equity, often via the Capital Asset Pricing Model using the risk-free rate (for example, Danish government bond yields), the market risk premium, and the company’s beta; working out the cost of debt as the after-tax interest rate on borrowing; and then weighting the two by the company’s mix of debt and equity.

3: Estimate the terminal value

After the explicit forecast period, the terminal value captures everything beyond it. The two common routes are the perpetuity growth method, which assumes cash flows grow at a steady long-term rate, and the exit multiple method, which applies an industry enterprise value multiple such as EV/EBITDA or EV/EBIT to the final year’s earnings or cash flow.

4: Calculate present values

Discount each year’s projected cash flow and the terminal value back to their present values using the discount rate. This step reflects the time value of money and the risks associated with the projected cash flows.

5: Sum the present values

Add the present values of the projected cash flows and the terminal value to arrive at the estimated enterprise value of the company.

It is worth noting that discounting free cash flow to the firm at the WACC produces an estimate of enterprise value, not the value of the owners’ equity directly. To move from enterprise value to equity value (often the figure an owner is most interested in), you would typically deduct net interest-bearing debt, meaning interest-bearing debt less cash and cash equivalents, and adjust for items such as non-operating assets and any minority interests. This bridge can change the headline figure considerably, so it is generally worth being clear about which value is being quoted.

Discounting projected cash flows and terminal value

Discounting projected cash flows and the terminal value is a central step in the DCF method. It involves applying the discount rate to each future cash flow and to the terminal value to calculate their present values.

For example, if a company’s projected cash flow in year 3 is 10 million DKK and the discount rate is 8%, the present value of that cash flow would be 10.000.000 DKK / (1 + 0,08)³, which is approximately 7.938.322 DKK (about 7,94 million DKK). Similarly, if the terminal value is estimated at 200 million DKK, its present value would be 200.000.000 DKK / (1 + 0,08)¹⁰, which is approximately 92.638.698 DKK (about 92,64 million DKK), assuming a 10-year forecast period.

Interpreting the results

Once the present values of the projected cash flows and the terminal value have been calculated and summed, the result is an estimate of the enterprise value of the company. After adjusting for net debt and other items as noted above, this can be used to estimate the value of the owners’ equity.

This estimate can feed into a range of decisions. If it comes out above a possible acquisition price, the opportunity may be worth exploring further, assuming the underlying assumptions hold; if it falls below a potential sale price, it may be worth weighing whether to divest. It can also give useful context in conversations with investors and inform decisions about how to allocate resources or where to invest.

That said, the method rests on assumptions and projections that carry real uncertainty. Reviewing those assumptions, running sensitivity analyses, and cross-checking against other valuation methods all help build a more complete picture of a company’s value.

Used carefully, the DCF method can offer useful insight into a company’s estimated worth and support more informed decision-making.

Applying the DCF method across different industries

The DCF framework is the same regardless of the business, but the assumptions that matter most, and the points where the model tends to be fragile, differ depending on the type of company. For founders and CFOs, knowing where to focus attention can be as useful as the method itself. The notes below cover a range of business profiles, with technology companies as one worked example.

Technology and high-growth companies

Technology companies often raise specific questions when a DCF is applied:

• Near-term free cash flow can be small or negative, because a large share of resources goes into product, sales, and marketing to drive growth. As a result, much of the estimated value tends to sit in the later forecast years and in the terminal value, which makes the output especially sensitive to the long-term growth rate and the discount rate.
• Recurring-revenue models (for example SaaS or subscription businesses) can make revenue easier to project from operating metrics such as annual recurring revenue, churn, and net revenue retention. High early growth rates are usually assumed to fade over time rather than continue indefinitely.
• Working capital can behave differently than in other sectors. A business that bills in advance may carry deferred revenue, which can act as a source of cash rather than a drain.
• Share-based compensation is a real economic cost even though it does not move cash directly. How it is treated can have a noticeable effect on projected cash flows and on the bridge to equity value.
• For private or early-stage companies, inputs such as beta and the cost of equity are harder to observe, so the discount rate often carries a larger risk premium. Many founders and CFOs cross-check a DCF against revenue or ARR multiples (for example EV/Revenue or EV/ARR) from comparable companies or transactions.
• The cap table is relevant for founders. Preferred shares, liquidation preferences, and option pools can affect how enterprise value translates into value for ordinary shareholders.

Capital-intensive businesses

For sectors such as manufacturing, real estate, and infrastructure, capital expenditure and depreciation tend to be central. The timing of large investments and replacement cycles can move cash flows significantly from year to year, so these assumptions usually warrant close attention. Debt often plays a larger role in the capital structure, which feeds directly into the WACC.

Cyclical businesses

Where earnings and cash flows move with the economic cycle, a single year can give a misleading picture. Using normalised or mid-cycle figures, and a discount rate that reflects the volatility, can help produce a more balanced estimate.

Mature and stable businesses

Established businesses with more predictable cash flows can lend themselves well to a DCF, since the projections tend to be steadier. Even so, the long-term growth assumption still matters, because it drives the terminal value.

Early-stage and pre-profit companies

When a business is not yet generating positive cash flow, the DCF result depends heavily on assumptions far into the future and on the terminal value. In these cases the method is often used alongside other approaches rather than on its own, and the output is usually treated as a range rather than a single figure.

What founders and CFOs often watch for

A handful of recurring issues tend to decide whether a DCF produces something useful. When most of the value sits in the terminal value, small shifts in the growth and discount-rate assumptions can move the headline figure a long way. Assuming high growth continues indefinitely usually overstates value, so growth is normally tapered toward a sustainable long-term rate. It also matters to keep the cash flow and the discount rate consistent, since free cash flow to the firm pairs with the WACC and gives enterprise value, while free cash flow to equity pairs with the cost of equity and gives equity value directly, and mixing the two is a common mistake. The bridge from enterprise value to equity value, through net debt, non-operating assets, and items such as preferred shares, can also change what actually reaches shareholders. And because the output simply reflects the inputs, a range of scenarios tends to be more informative than a single point estimate.

None of this is unique to one sector, but the weight each point carries varies. Working out which assumptions are really driving the valuation for a given business is usually where the most useful effort goes.

Conclusion

In this blog, we looked at the Discounted Cash Flow (DCF) method, a widely used approach for estimating the value of companies based on their future cash flow potential. As a business owner in Denmark, understanding this method can provide useful context, while remembering that the result depends on the assumptions used and is best treated as an estimate rather than a precise figure.

As a business owner in Denmark, you have put significant effort into building your enterprise. Understanding the estimated value of your company can help when making strategic decisions, preparing for negotiations, or exploring growth opportunities.

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(This blog was last updated: 16.09.2026)

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