A discounted cash flow model is only as good as its weakest assumption. The math is simple — project free cash flows, discount them to today — but small errors compound into valuations that are confidently wrong. These are the five mistakes we see most often.
1. Letting terminal value do all the work
In many models, 70–85% of the total value sits in the terminal value. If that's true of yours, your valuation is really a perpetuity assumption wearing a five-year forecast as a disguise.
Fix: extend the explicit forecast until the business plausibly reaches steady state, sanity-check the implied exit multiple, and never let the terminal growth rate exceed long-run GDP growth.
2. Mismatching cash flows and discount rates
Unlevered free cash flow must be discounted at the weighted average cost of capital (WACC); cash flow to equity must be discounted at the cost of equity. Mixing them double-counts or ignores the effect of debt.
Fix: pick one framework and stay consistent all the way to the bridge from enterprise value to equity value.
3. Hockey-stick growth with no operational story
Revenue that grows 4% historically but 15% in the forecast needs a reason: new products, new markets, pricing action. Optimism is not a driver.
Fix: build revenue from drivers (volume × price, cohorts, capacity) rather than typing a growth rate, and compare your forecast against the company's own history and competitors.
4. Forgetting that growth costs money
Growing companies consume working capital and capex. A model that grows revenue 15% while holding receivables, inventory, and capex flat is printing free cash that doesn't exist.
Fix: tie working capital to revenue (DSO, DIO, DPO) and keep capex at least at depreciation for a steady-state business.
5. Presenting one number instead of a range
A DCF's output is a range, not a point. Small, defensible changes in WACC or terminal growth move the answer by 20% or more.
Fix: always show a sensitivity table across discount rate and terminal growth, and state the base-case assumptions next to the number.
If you want to build this muscle systematically, the Advanced Financial Modeling & Forecasting course covers driver-based forecasting, scenario design, and sensitivity analysis — and you can experiment instantly with our free DCF calculator.