{"id":13283,"date":"2022-10-11T23:56:00","date_gmt":"2022-10-11T15:56:00","guid":{"rendered":"https:\/\/www.granitefirm.com\/blog\/us\/?p=13283"},"modified":"2026-05-18T12:39:41","modified_gmt":"2026-05-18T04:39:41","slug":"dcf-calculator","status":"publish","type":"post","link":"https:\/\/www.granitefirm.com\/blog\/us\/2022\/10\/11\/dcf-calculator\/","title":{"rendered":"Free DCF (Discounted Cash Flow) Calculator"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_85 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #ffffff;color:#ffffff\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #ffffff;color:#ffffff\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/10\/11\/dcf-calculator\/#What_is_Discounted_Cash_Flow\" >What is Discounted Cash Flow?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/10\/11\/dcf-calculator\/#Features_of_this_calculator\" >Features of this calculator<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/10\/11\/dcf-calculator\/#How_to_use_this_calculator\" >How to use this calculator?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/10\/11\/dcf-calculator\/#Two_practical_examples\" >Two practical examples<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/10\/11\/dcf-calculator\/#Table_for_US_stock_investment_toolset\" >Table for US stock investment toolset<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/10\/11\/dcf-calculator\/#Special_reminder\" >Special reminder<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/10\/11\/dcf-calculator\/#Buffetts_Reminder_on_DCF\" >Buffett&#8217;s Reminder on DCF<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/10\/11\/dcf-calculator\/#Terminate_value_for_estimating_intrinsic_value\" >Terminate value for estimating intrinsic value<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/10\/11\/dcf-calculator\/#Discount_rate_for_estimating_intrinsic_value\" >Discount rate for estimating intrinsic value<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/10\/11\/dcf-calculator\/#Related_articles\" >Related articles<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_Discounted_Cash_Flow\"><\/span>What is Discounted Cash Flow?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>For <a href=\"https:\/\/en.wikipedia.org\/wiki\/Discounted_cash_flow\" target=\"_blank\" rel=\"noreferrer noopener\">DCF<\/a>, see the detailed explanation on pages 330-337 of my book, &#8220;<a href=\"https:\/\/www.books.com.tw\/products\/0010889106\" target=\"_blank\" rel=\"noreferrer noopener\">The Rules of Super Growth Stocks Investing<\/a>&#8220;, and a step-by-step calculus for a practical example.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Features_of_this_calculator\"><\/span>Features of this calculator<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>This calculator is used as a calculation template for user to adjust various parameters of the discounted cash flow model according to their own needs and the different company to be calculated, and finally calculate the reasonable intrinsic value of the company.<\/p>\n\n\n\n<p>Please be noted:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The default value of each field shown on the screen is based on Apple&#8217;s data at the end of the second quarter of 2022. <\/li>\n\n\n\n<li>Clicking on the words &#8220;Annual Free Cash Flow&#8221; on the screen will open Apple&#8217;s important statistics on the Yahoo Finance website, where you can find Apple&#8217;s annual free cash flow figures. You only need to change the U.S. stock code of the company on the website to find the statistics of the corresponding company. <\/li>\n\n\n\n<li>Clicking the words &#8220;annualized growth rate of cash flow in the next ten years&#8221; on the screen will open the important statistics of Apple on the Yahoo Finance website. You can find Apple&#8217;s revenue growth rate in the next few years. This calculates the annualized growth rate of cash flow. You only need to change the U.S. stock code of the company on the website to find the statistics of the corresponding company. <\/li>\n\n\n\n<li>For the discount rate figures, please refer to the detailed description on pages 330-337 of the book &#8220;Super Growth Stock Investing Rules&#8221;. <\/li>\n\n\n\n<li>Clicking on the words &#8220;average GDP over the past ten years&#8221; on the screen will allow you to query the average GDP and compound growth rate statistics of the United States in the past. <\/li>\n\n\n\n<li>Clicking on the word &#8220;Number of outstanding shares&#8221; on the screen will open the important statistics of Apple on the Yahoo Finance website, where you can find the number of outstanding shares of Apple. You only need to change the U.S. stock code of the company on the website to find the statistics of the corresponding company.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_to_use_this_calculator\"><\/span>How to use this calculator?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Users simply click on this <a href=\"https:\/\/www.granitefirm.com\/us\/tools\/dcf\/\">link<\/a> to connect to the Querier to Annualized rate of return for Taiwan Stock Exchange and see the following screen:<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"568\" height=\"366\" src=\"https:\/\/www.granitefirm.com\/blog\/us\/wp-content\/uploads\/sites\/2\/2022\/09\/dcf.png\" alt=\"DCF Calculator\" class=\"wp-image-13303\" srcset=\"https:\/\/www.granitefirm.com\/blog\/us\/wp-content\/uploads\/sites\/2\/2022\/09\/dcf.png 568w, https:\/\/www.granitefirm.com\/blog\/us\/wp-content\/uploads\/sites\/2\/2022\/09\/dcf-300x193.png 300w\" sizes=\"auto, (max-width: 568px) 85vw, 568px\" \/><\/figure>\n\n\n\n<p>Users only need to input the following fields on the screen:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Annual Free Cash Flow<\/li>\n\n\n\n<li>Annualized growth rate of cash flow in the next ten years<\/li>\n\n\n\n<li>Discount Rate<\/li>\n\n\n\n<li>Average GDP over the past ten years<\/li>\n\n\n\n<li>Number of shares outstanding<\/li>\n<\/ul>\n\n\n\n<p>The default values for the above fields will be based on Apple&#8217;s data at the end of the second quarter of 2022. You can change the value of each field of the corresponding company according to the company you want to calculate.<\/p>\n\n\n\n<p>After the input is complete, click the &#8220;Intrinsic Value per Share&#8221; button on the screen, and you can see the calculation result of the intrinsic value per share in the &#8220;Calculation Results&#8221; area below.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Two_practical_examples\"><\/span>Two practical examples<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In order to let investors understand how to use my free online DCF tool program, you can refer to my following two famous practical examples for step-by-step explanation:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2024\/04\/01\/tsmc-dcf-value\/\">What&#8217;s TSMC DCF intrinsic value?How to calculate it quickly with a free tool?<\/a>&#8220;: Apply my free online DCF tool program to TSMC and explain it step by step.<\/li>\n\n\n\n<li>Pages 330 to 337 of my book For <a href=\"https:\/\/en.wikipedia.org\/wiki\/Discounted_cash_flow\" target=\"_blank\" rel=\"noreferrer noopener\">DCF<\/a>, see the detailed explanation on pages 330-337 of my book, &#8220;<a href=\"https:\/\/www.books.com.tw\/products\/0010889106\" target=\"_blank\" rel=\"noreferrer noopener\">The Rules of Super Growth Stocks Investing<\/a>&#8220;, it use Apple as an example to provide very detailed step-by-step instructions.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Table_for_US_stock_investment_toolset\"><\/span>Table for US stock investment toolset <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Special_reminder\"><\/span>Special reminder<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>For all major market index annualized return query tools listed in the table; including Taiwan Stock Index, Dow Jones Index, S&amp;P 500 Index, Nasdaq Index, Philadelphia Semiconductor Index, not only annualized return query , you can also query the index return rate in any year\u2500\u2500just enter the year you want to query in both the start and end fields.<\/p>\n\n\n\n<p>The following is a list of must-have US stock investment free tools developed by Andy Lin:<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td>The online tool I develop<\/td><td>URL for the tool<br><\/td><td>For detailed function description, please click the description article directly<\/td><\/tr><tr><td><strong>Andy Lin&#8217;s Indices<\/strong><\/td><td><\/td><td><\/td><\/tr><tr><td>Andy Lin self-compiled  Index, daily updated (including growth stock index, moat index, tracking stock index and other three major indices)<\/td><td><a href=\"https:\/\/granitefirm.com\/us\/\" target=\"_blank\" rel=\"noreferrer noopener\">Andy Lin&#8217;s Indices<\/a><\/td><td>&#8220;<a href=\"https:\/\/granitefirm.com\/us\/\" target=\"_blank\" rel=\"noreferrer noopener\">Andy Indices will be daily updated on the homepage<\/a><\/td><\/tr><tr><td><strong>Annualized rate of return and compound interest<\/strong><\/td><td><\/td><td><\/td><\/tr><tr><td>IRR calculator<\/td><td><a href=\"https:\/\/www.granitefirm.com\/us\/tools\/irr\/\" target=\"_blank\" rel=\"noreferrer noopener\">IRR calculator<\/a><\/td><td>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/08\/30\/irr-calculator\/\" target=\"_blank\" rel=\"noreferrer noopener\">IRR calculator<\/a>&#8220;<\/td><\/tr><tr><td>Simple and compound interest calculator<\/td><td><a href=\"https:\/\/www.granitefirm.com\/us\/tools\/compoundinterest\/\" target=\"_blank\" rel=\"noreferrer noopener\">Simple and compound interest calculator<\/a> <\/td><td>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/09\/05\/compound-interest\/\" target=\"_blank\" rel=\"noreferrer noopener\">Simple and compound interest calculator<\/a>&#8220;<\/td><\/tr><tr><td><strong>Famous market index<\/strong><\/td><td><\/td><td><\/td><\/tr><tr><td>Taiwan stock exchange<\/td><td><a href=\"https:\/\/www.granitefirm.com\/us\/tools\/taiex\/\">Querier to Annualized rate of return for Taiwan Stock Exchange<\/a> <\/td><td>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/09\/15\/taiwan-stock-exchange\/\" target=\"_blank\" rel=\"noreferrer noopener\">Querier to Annualized rate of return for Taiwan Stock Exchange<\/a>&#8220;<\/td><\/tr><tr><td>Dow Jones Industrial Average (DJIA) Index<\/td><td><a href=\"https:\/\/www.granitefirm.com\/us\/tools\/djia\/\">Querier to Annualized rate of return for Dow Jones Industrial Average Index<\/a> <\/td><td>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/10\/19\/dow-jones-querier\/\" target=\"_blank\" rel=\"noreferrer noopener\">Querier to Annualized rate of return for Dow Jones Industrial Average (DJIA) Index<\/a>&#8220;<\/td><\/tr><tr><td>S&amp;P 500<\/td><td><a href=\"https:\/\/www.granitefirm.com\/us\/tools\/sp500\/\" target=\"_blank\" rel=\"noreferrer noopener\">Querier to Annualized rate of return for S&amp;P 500 Index<\/a> <\/td><td>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/09\/11\/sp-500-index-querier\/\" target=\"_blank\" rel=\"noreferrer noopener\">Querier to Annualized rate of return for S&amp;P 500 Index<\/a>&#8220;<\/td><\/tr><tr><td>Nasdaq<\/td><td><a href=\"https:\/\/www.granitefirm.com\/us\/tools\/nasdaq\/\" target=\"_blank\" rel=\"noreferrer noopener\">Querier to Annualized rate of return for Nasdaq Index<\/a> <\/td><td>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/09\/25\/nasdaq-index-querier\/\" target=\"_blank\" rel=\"noreferrer noopener\">Querier to Annualized rate of return for Nasdaq Index<\/a>&#8220;<\/td><\/tr><tr><td>Philadelphia Semiconductor Index <\/td><td><a href=\"https:\/\/www.granitefirm.com\/us\/tools\/sox\/\">Querier to Annualized rate of return for Philadelphia Semiconductor Index<\/a> <\/td><td>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/10\/05\/philadelphia-semiconductor\/\" target=\"_blank\" rel=\"noreferrer noopener\">Querier to Annualized rate of return for Philadelphia Semiconductor Index (SOX)<\/a>&#8220;<\/td><\/tr><tr><td><strong>Important ecnomic data query<\/strong><\/td><td><\/td><td><\/td><\/tr><tr><td>US historial GDP querier<\/td><td><a href=\"https:\/\/www.granitefirm.com\/us\/tools\/gdp\/\" target=\"_blank\" rel=\"noreferrer noopener\">US <\/a><a href=\"https:\/\/www.granitefirm.com\/us\/tools\/gdp\/\" target=\"_blank\" rel=\"noreferrer noopener\">GDP querier<\/a> <\/td><td>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/09\/29\/us-gross-domestic-product-gdp-querier\/\" target=\"_blank\" rel=\"noreferrer noopener\">US Gross domestic product (GDP) querier<\/a>&#8220;<\/td><\/tr><tr><td>Querier of US Inflation Rate<\/td><td><a href=\"https:\/\/www.granitefirm.com\/us\/tools\/inflation\/\" target=\"_blank\" rel=\"noreferrer noopener\">Querier of US Inflation Rate<\/a>  <\/td><td>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/09\/19\/us-inflation-rate-querier\/\" target=\"_blank\" rel=\"noreferrer noopener\">Querier of US Inflation Rate<\/a>&#8220;<\/td><\/tr><tr><td><strong>Valuation<\/strong><\/td><td><\/td><td><\/td><\/tr><tr><td>DCF (Discounted Cash Flow) Calculator<\/td><td><a href=\"https:\/\/www.granitefirm.com\/us\/tools\/dcf\/\">DCF (Discounted Cash Flow) Calculator<\/a> <\/td><td>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/10\/11\/dcf-calculator\/\" target=\"_blank\" rel=\"noreferrer noopener\">DCF (Discounted Cash Flow) Calculator<\/a>&#8220;<\/td><\/tr><tr><td>S&amp;P 500 historical PE Ratio and average Querier<\/td><td><a href=\"https:\/\/www.granitefirm.com\/us\/tools\/sp500pe\/\">S&amp;P 500 historical PE Ratio and average Querier<\/a> <\/td><td>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/10\/31\/14481\/\" target=\"_blank\" rel=\"noreferrer noopener\">S&amp;P 500 P\/E ratio has been rising in the past century, S&amp;P 500 PE Ratio and Average Querier<\/a>&#8220;<\/td><\/tr><tr><td><strong>Data share<\/strong><\/td><td><\/td><td><\/td><\/tr><tr><td>Data and sample download<\/td><td><a href=\"http:\/\/www.granitefirm.com\/us\/tools\/filedownload\/\" target=\"_blank\" rel=\"noreferrer noopener\">Sample and file download<\/a><\/td><td>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/10\/27\/sample-and-file-download\/\" target=\"_blank\" rel=\"noreferrer noopener\">Sample and file download<\/a>&#8220;<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>For the detail, please see &#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/11\/08\/investment-toolset\/\">Free online US stock investment toolset<\/a>\uff02.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Buffetts_Reminder_on_DCF\"><\/span>Buffett&#8217;s Reminder on DCF<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Terminate_value_for_estimating_intrinsic_value\"><\/span>Terminate value for estimating intrinsic value<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Below contents is the full transcript from 1995 Berkshire Hathaway\u00a0shareholders Q&amp;A meeting.<\/p>\n\n\n\n<p>AUDIENCE MEMBER: \u2014 Keith Briar from San Francisco. I have a question. When you\u2019re valuing the companies and you discount back the future earnings that you talk about, how many years out do you generally go? And if you don\u2019t go out a general number of years, how do you arrive at that time period?<\/p>\n\n\n\n<p>WARREN BUFFETT: Well, that\u2019s a very good question. And it\u2019s \u2014 I mean, it\u2019s the heart of investing or buying businesses, which we regard as the same thing, but \u2014 And it is the framework in which we operate. I mean, we are trying to look at businesses in terms of what kind of cash can they produce, if we\u2019re buying all of them, or will they produce, if we\u2019re buying part of them. And there\u2019s a difference. And then at what discount rate do we bring it back. And I think your question was how far out do we look, and all that. <\/p>\n\n\n\n<p>Despite the fact that we can define that in a very kind of simple and direct equation, you know, we are \u2014 we\u2019ve never actually sat down and written out a set of numbers to relate that equation. We do it in our heads, in a way, obviously. I mean, that\u2019s what it\u2019s all about. But there is no piece of paper.<\/p>\n\n\n\n<p>And we never \u2014 there never was a piece of paper that shows what our calculation on Helzberg\u2019s or See\u2019s Candy or The Buffalo News was, in that respect. So, it would be attaching a little more scientific quality to our analysis than there really is, if I gave you some gobbledygook about, \u201cWell, we do it for 18 years and stick a terminal value on and do all of this.\u201d We are sitting in the office thinking about that question with each business or each investment. And we have discount rates, in a general way, in mind. <\/p>\n\n\n\n<p>But we really like the decision to be obvious enough to us that it doesn\u2019t require making a detailed calculation. And it\u2019s the framework. But it\u2019s not applied in the sense that we actually fill in all the variables. Is that a fair way of stating it, Charlie?<\/p>\n\n\n\n<p>CHARLIE MUNGER: Yeah. Berkshire is being run the way Thomas Hunt Morgan, the great Nobel laureate, ran the biology department at Caltech. He banned the Friden calculator, which was the computer of that era. And people said, \u201cHow can you do this? Every place else in Caltech, we have Friden calculators going everywhere.\u201d And he said, \u201cWell, we\u2019re picking up these great nuggets of gold just by organized common sense, and resources are short, and we\u2019re not going to resort to any damn placer mining as long as we can pick up these major aggregations of gold.\u201d <\/p>\n\n\n\n<p>That\u2019s the way Berkshire works. And I hope the placer mining era will never come. Somebody once subpoenaed our staffing papers on some acquisition. And of course, not only did we not have any staffing papers, we didn\u2019t have any staff. (Laughter and applause)<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Discount_rate_for_estimating_intrinsic_value\"><\/span>Discount rate for estimating intrinsic value<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Below contents is the full transcript from 1996 Berkshire Hathaway\u00a0shareholders Q&amp;A meeting.<\/p>\n\n\n\n<p>AUDIENCE MEMBER: Yes. Mr. Buffett, good morning. My name\u2019s Ed Walzak (PH) from New York. I\u2019m a student and an admirer of your investment philosophy. I have a question. In determining a company\u2019s intrinsic value, you seem to write or indicate that you project out a company\u2019s owner earnings for a number of years, and then discount that back by prevailing rates. <\/p>\n\n\n\n<p>My question is, how much of a premium, if any, to prevailing risk-free rates do you demand when you discount back the owner earnings of a company? Or stated differently, for example, today, with loan rates at about 7 percent, if you did the same exercise with Coca-Cola, at what rate of interest would you discount back their owner earnings?<\/p>\n\n\n\n<p>WARREN BUFFETT: Yeah. We get asked that question a lot. And we\u2019ve answered it to some extent in past annual reports about what discount rate to use. We basically think in terms of the long-term government rate. And there may be times, when in a very \u2014 because we don\u2019t think we\u2019re any good at predicting interest rates, but probably in times of very \u2014 what would seem like very low rates \u2014 we might use a little higher rate. <\/p>\n\n\n\n<p>But we don\u2019t put the risk factor in, per se, because essentially, the purity of the idea is that you\u2019re discounting future cash. And it doesn\u2019t make any difference whether cash comes from a risky business or a safe business \u2014 so-called safe business. So, the value of the cash delivered by a water company, which is going to be around for a hundred years, is not different than the value of the cash derived from some high-tech company, if any, that \u2014 (laughter) \u2014 you might be looking at. It may be harder for you to make the estimate. And you may, therefore, want a bigger discount when you get all through with the calculation.<\/p>\n\n\n\n<p>But up to the point where you decide what you\u2019re willing to pay \u2014 you may decide you can\u2019t estimate it at all. I mean, that\u2019s what happens with us with most companies. But we believe in using a government bond-type interest rate. We believe in trying to stick with businesses where we think we can see the future reasonably well \u2014 you never see it perfectly, obviously \u2014 but where we think we have a reasonable handle on it. And we would differentiate to some extent. <\/p>\n\n\n\n<p>We don\u2019t want to go below a certain threshold of understanding. So, we want to stick with businesses we think we understand quite well, and not try to have the whole panoply with all different kinds of risk rates, because, frankly, we think that\u2019d just be playing games with numbers. I mean, we \u2014 I don\u2019t think you can stick something \u2014 numbers on a highly speculative business, where the whole industry\u2019s going to change in five years, and have it mean anything when you get through. If you say I\u2019m going to stick an extra 6 percent in on the interest rate to allow for the fact \u2014 I tend to think that\u2019s kind of nonsense.<\/p>\n\n\n\n<p>I mean, it may look mathematical. But it\u2019s mathematical gibberish in my view. You better just stick with businesses that you can understand, use the government bond rate. And when you can buy them \u2014 something you understand well \u2014 at a significant discount, then, you should start getting excited. Charlie? (Laughter)<\/p>\n\n\n\n<p>CHARLIE MUNGER: Yeah. The discounts were once greater than we now see.<\/p>\n\n\n\n<p>WARREN BUFFETT: That\u2019s all you\u2019re going to get, folks. 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I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.<\/em><\/li>\n\n\n\n<li><em>I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers&#8217; direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.<\/em><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>What is DCF? See the detailed explanation on pages 330-337 of my book, &#8220;The Rules of Super Growth Stocks Investing&#8221;, and a step-by-step calculus for a practical example.<\/p>\n","protected":false},"author":1,"featured_media":13295,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[675,343],"tags":[],"class_list":["post-13283","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-site-announcement","category-stock-valuation"],"_links":{"self":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/13283","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/comments?post=13283"}],"version-history":[{"count":33,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/13283\/revisions"}],"predecessor-version":[{"id":42296,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/13283\/revisions\/42296"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media\/13295"}],"wp:attachment":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media?parent=13283"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/categories?post=13283"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/tags?post=13283"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}