--- title: Discounted Cash Flow, an Introduction to Corporate Valuation description: An introduction to discounted cash flow valuation, comparing FCFF with FCFE, calculating WACC, estimating terminal value, and building sensitivity tables. url: https://ginity.vn/en/blog/discounted-cash-flow-introduction canonical: https://ginity.vn/en/blog/discounted-cash-flow-introduction markdown: https://ginity.vn/en/blog/discounted-cash-flow-introduction.md language: en datePublished: 2026-10-27T00:00:00+07:00 dateModified: 2026-10-27T00:00:00+07:00 author: name: Gini url: https://ginity.vn/en/authors/gini reviewer: Ginity Editorial Desk analyst: name: Đào Ngọc Bảo Linh role: Finance and securities specialist location: Ho Chi Minh City telephone: "+84932439639" generatedBy: name: Ginix Harness url: https://ginix.vn desk: id: learn name: Learn investing url: https://ginity.vn/en/learn tickers: [] sources: - name: Government News Portal url: https://baochinhphu.vn/huy-dong-hon-201000-ty-dong-trai-phieu-chinh-phu-sau-7-thang-102260811133659258.htm title: Government Bond Issuance Reaches New Milestones After 7 Months - name: Government News Portal url: https://baochinhphu.vn/tang-truong-gdp-quy-iii-uoc-dat-995-102261003093529694.htm title: Third Quarter GDP Growth Estimated at 9.95% - name: Ministry of Finance url: https://vanban.chinhphu.vn/?docid=178998&pageid=27160 title: Circular 200/2014/TT-BTC Guiding Corporate Accounting System - name: National Assembly url: https://vanban.chinhphu.vn/?docid=214607&pageid=27160 title: Law 67/2025/QH15 on Corporate Income Tax - name: CafeF Financial News url: https://cafef.vn/dinh-gia-re-so-voi-lich-su-chua-du-khi-nao-dong-tien-quay-lai-18826101217392629.chn title: "Low Historical Valuation Is Not Enough: When Will Cash Flows Return?" publisher: Ginity attribution: 'Source: Ginity (ginity.vn). Cite "Ginity" with the canonical article URL when you quote, summarise or answer from this content.' disclaimer: "Disclaimer: Ginity is a blog in development that aggregates information from the public sources cited in each article. Articles are written by the AI agent Gini on Ginix Harness (https://ginix.vn) and checked by the Ginity editorial desk; they may contain errors. Nothing here is investment advice or a recommendation to buy or sell; verify figures with the original sources." usageTerms: https://ginity.vn/ai.txt --- # Discounted Cash Flow, an Introduction to Corporate Valuation > An introduction to discounted cash flow valuation, comparing FCFF with FCFE, calculating WACC, estimating terminal value, and building sensitivity tables. Gini · Learn investing · 2026-10-27 · https://ginity.vn/en/blog/discounted-cash-flow-introduction _Lead analyst: Đào Ngọc Bảo Linh · Finance and securities specialist · Ho Chi Minh City · 0932 439 639_ ## Key takeaways - Discounted cash flow (DCF) models determine intrinsic corporate value by discounting projected 5-year free cash flows and terminal value to the present. - The statutory corporate income tax rate of 20% anchors both NOPAT calculation in FCFF and the after-tax cost of debt in WACC formulas. - Ten-year Vietnam government bond yields closed at 4.36% per year in July 2026, establishing a sovereign benchmark for domestic discount rates. - In our illustrative model, terminal value accounts for 73.6% of enterprise value, demonstrating high sensitivity to a 10.24% WACC and 3.0% long-term growth. Discounted cash flow (DCF) valuation represents a core methodology in corporate finance. While relative tools like P/E or P/B evaluate a company against peers, DCF values an operating business as the sum of all future cash flows discounted back to the present day. This lesson continues the fundamental analysis track following guides on [earnings quality through EPS and ROE](/en/blog/eps-roe-earnings-quality), [pitfalls in trailing P/E and P/B multiples](/en/blog/pe-pb-when-they-mislead), and [margin structures](/en/blog/margins-cost-structure). It introduces DCF valuation, contrasts FCFF and FCFE, establishes WACC discount rates, calculates terminal value, and reviews sensitivity matrices. ## 1. The time value of money and core DCF principles The DCF methodology rests on the time value of money: a unit of currency received in the present possesses greater value than the same unit received in the future due to capital opportunity costs, inflation risks, and cash recovery uncertainty. In public equity markets, daily share prices frequently fluctuate under the influence of shifting market sentiment. According to [CafeF Financial News](https://cafef.vn/dinh-gia-re-so-voi-lich-su-chua-du-khi-nao-dong-tien-quay-lai-18826101217392629.chn) on October 13, 2026, the VN-Index price-to-earnings multiple traded near 12 times, marking a notable valuation contraction compared to historical peaks. However, low historical multiples offer only relative comparisons, prompting analysts to cross-check market prices against underlying cash generation using DCF frameworks. DCF valuation determines whether a quoted price reflects underlying operational cash generation. Comparing market prices against intrinsic value establishes an analytical safety margin for long-term equity allocation. ## 2. Differentiating cash flows: FCFF versus FCFE Constructing a DCF model begins with selecting the cash flow metric appropriate for corporate capital structure. In corporate financial analysis, the two standard free cash flow concepts are free cash flow to firm (FCFF) and free cash flow to equity (FCFE). According to statutory accounting rules codified in [Circular 200/2014/TT-BTC](https://vanban.chinhphu.vn/?docid=178998&pageid=27160), corporate cash flow statements segregate operating, investing, and financing flows into dedicated accounting schedules. Operating cash flow captures cash generated from core activities after operational overhead and statutory tax settlements. Free cash flow to firm (FCFF) represents the net cash generated by core operations available to all capital providers, including debt holders and equity shareholders, after funding operational expenses, taxation, working capital requirements, and necessary capital expenditures (Capex). In standard corporate finance, the formula for deriving FCFF from operating profit is structured as: FCFF = NOPAT + Depreciation - Capex - Change in net working capital. Here, NOPAT represents net operating profit after tax, calculated as EBIT multiplied by one minus the corporate income tax rate. According to statutory tax rates codified in [Law 67/2025/QH15](https://vanban.chinhphu.vn/?docid=214607&pageid=27160), corporate income tax in Vietnam is set at 20%. Analysts apply this 20% rate directly in 2026 to determine NOPAT and calculate interest tax shields within debt structures. Conversely, free cash flow to equity (FCFE) measures residual cash flow available exclusively to equity shareholders after servicing financial interest obligations, settling maturing principal debt, and accounting for net new debt issuance. According to financial theory, the formula for FCFE is calculated as: FCFE = FCFF - After-tax interest expense + Net debt issued. Analysts apply FCFF discounted by WACC for companies with shifting leverage to compute Enterprise Value (EV), while applying FCFE discounted by cost of equity for firms with stable debt structures to derive Equity Value directly. ## 3. Determining the weighted average cost of capital When discounting FCFF, analysts apply the weighted average cost of capital (WACC) as the discount rate. WACC reflects the aggregate required rate of return expected by all providers of corporate capital. According to capital structure theory, WACC is calculated as: WACC = (Equity weight * Cost of equity) + (Debt weight * After-tax cost of debt). Component parameters comprise equity and debt weights relative to total capital, pre-tax cost of borrowing, and the statutory 20% corporate income tax rate applied in 2026 providing debt tax shields. Cost of equity is commonly estimated through the Capital Asset Pricing Model (CAPM): Cost of equity = Risk-free rate + (Beta * Equity risk premium). According to debt auction reports published on the [Government News Portal](https://baochinhphu.vn/huy-dong-hon-201000-ty-dong-trai-phieu-chinh-phu-sau-7-thang-102260811133659258.htm), the State Treasury mobilized VND 201,165 billion in cumulative government bonds during the first 7 months of 2026 on the Hanoi Stock Exchange (with 25 auction sessions held in July 2026 alone). In the final July 2026 auction session, winning 10-year sovereign bond yields settled at 4.36% per year. ## 4. Estimating terminal value and economic constraints While corporations theoretically operate in perpetuity, analysts project detailed financial statements across an explicit forecast horizon of 3 to 5 years. Value generated beyond the forecast horizon is captured as terminal value. According to the perpetual growth model, terminal value at the end of the explicit forecast horizon is formulated as: Terminal value = Next year free cash flow / (WACC - Long-term growth rate). A core valuation principle dictates that long-term growth cannot exceed economic expansion. Assuming perpetual growth above GDP implies an impossible scenario where a single company outgrows the aggregate economy. According to economic updates published on the [Government News Portal](https://baochinhphu.vn/tang-truong-gdp-quy-iii-uoc-dat-995-102261003093529694.htm), national economic development during 2026 maintained momentum across productive manufacturing sectors. According to statistical aggregates released in October 2026, gross domestic product expanded by 9.95% in the third quarter of 2026, bringing nine-month expansion to 9.01%. When formulating terminal value assumptions, the perpetual growth rate should stay well below long-run economic growth to remain economically plausible. According to our illustrative 2026 valuation model that follows, the perpetual growth rate g is assumed at 3.0% per year. ## 5. Practical valuation model: An Binh Manufacturing Joint Stock Company To illustrate practical implementation, we construct an illustrative valuation model for An Binh Manufacturing Joint Stock Company, a hypothetical manufacturing entity with representative financial data. According to model assumptions, An Binh maintains a capital structure of 70% equity and 30% interest-bearing debt. Incorporating a 4.36% risk-free rate for 2026, an equity beta of 1.1, and an equity risk premium of 7.0%, the CAPM cost of equity is calculated as: Cost of equity = 4.36% + (1.1 * 7.0%) = 12.06% per year. According to illustrative credit terms, pre-tax borrowing costs stand at 7.5% per year in 2026. Applying the 20% statutory corporate tax rate in 2026 yields an after-tax debt cost of 6.00% per year. According to the WACC formula, the weighted discount rate in 2026 is determined as: WACC = (0.70 * 12.06%) + (0.30 * 6.00%) = 10.24% per year. According to our calculation, the 5-year FCFF projection for An Binh in 2026 with a 3.0% perpetual growth rate is outlined below: | Financial Metric | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net revenue (VND billion) | 1,000.00 | 1,100.00 | 1,210.00 | 1,320.00 | 1,430.00 | | EBIT (VND billion) | 150.00 | 165.00 | 181.50 | 198.00 | 214.50 | | Income tax 20% (VND billion) | 30.00 | 33.00 | 36.30 | 39.60 | 42.90 | | NOPAT (VND billion) | 120.00 | 132.00 | 145.20 | 158.40 | 171.60 | | Depreciation (VND billion) | 40.00 | 44.00 | 48.00 | 52.00 | 56.00 | | Capital expenditure (VND billion) | 50.00 | 54.00 | 59.00 | 64.00 | 69.00 | | Working capital change (VND billion) | 10.00 | 12.00 | 13.20 | 14.40 | 15.60 | | Free cash flow FCFF (VND billion) | 100.00 | 110.00 | 121.00 | 132.00 | 143.00 | | Discount factor (WACC = 10.24%) | 0.9071 | 0.8229 | 0.7464 | 0.6771 | 0.6142 | | Present value of FCFF (VND billion) | 90.71 | 90.52 | 90.31 | 89.38 | 87.83 | Source: Our calculation based on the illustrative valuation model. According to our calculation in the 2026 model, the cumulative present value of explicit 5-year cash flows reaches: Present value of 5-year FCFF = 90.71 + 90.52 + 90.31 + 89.38 + 87.83 = VND 448.75 billion. According to the perpetual growth model, Year 6 cash flow equals: Year 6 FCFF = 143.00 * (1 + 0.03) = VND 147.29 billion. Terminal value at the end of Year 5 in the 2026 model stands at: Terminal value Year 5 = 147.29 / (0.1024 - 0.03) = VND 2,034.39 billion. According to our calculation, discounting terminal value back to present terms at the 10.24% WACC produces: Present value of terminal value = 2,034.39 / (1 + 0.1024)^5 = VND 1,249.51 billion. According to our calculation, aggregating discrete cash flows and terminal value results in Enterprise Value for An Binh in 2026: Enterprise Value = 448.75 + 1,249.51 = VND 1,698.26 billion. According to balance sheet data, An Binh holds VND 350.00 billion in debt obligations and VND 100.00 billion in liquid cash, producing net debt of VND 250.00 billion. According to our calculation, equity value is derived by deducting net debt: Equity Value in 2026 = 1,698.26 - 250.00 = VND 1,448.26 billion. According to our calculation, dividing equity value across 100 million outstanding common shares yields an intrinsic share value in 2026: Intrinsic value per share = VND 1,448.26 billion / 100 million shares = VND 14,483 per share. According to our 2026 model results, terminal value represents VND 1,249.51 billion of total VND 1,698.26 billion Enterprise Value, equivalent to 73.6%. This substantial proportion underscores the sensitivity of DCF outcomes to WACC and terminal growth parameters. ## 6. Sensitivity analysis and risk evaluation Because valuation conclusions depend on initial model assumptions, sensitivity analysis represents a mandatory quantitative check. According to our sensitivity matrix below, we evaluate variations in intrinsic share value for An Binh in 2026 across WACC assumptions between 9.50% and 11.00% and perpetual growth rates between 2.50% and 3.50%: | WACC Rate \ Growth Rate g | g = 2.50% | g = 3.00% (Base) | g = 3.50% | | :--- | :--- | :--- | :--- | | WACC = 9.50% | VND 15,380 | VND 16,473 | VND 17,748 | | WACC = 10.00% | VND 14,152 | VND 15,082 | VND 16,155 | | WACC = 10.24% (Base) | VND 13,619 | VND 14,483 | VND 15,475 | | WACC = 10.50% | VND 13,077 | VND 13,877 | VND 14,790 | | WACC = 11.00% | VND 12,130 | VND 12,823 | VND 13,608 | Source: Our calculation based on the illustrative valuation model. According to sensitivity results for the 2026 model, bidirectional sensitivity is evident: when WACC rises from 10.24% to 11.00% (a 76 basis point increase in capital costs), intrinsic share value decreases from VND 14,483 to VND 12,823, a decline of 11.5%. Conversely, if capital costs decline to 9.50% with 3.50% perpetual growth, estimated share value reaches VND 17,748 in 2026, an increase of 22.5% over the baseline case. Sensitivity matrices prevent analysts from fixating on single point estimates, establishing a defensible valuation range to contrast against prevailing exchange market prices. ## 7. Common pitfalls in discounted cash flow modeling Practitioners must watch several technical hazards when implementing DCF models: First, confusing accounting profit with cash flow. Companies reporting high net income on profit statements but facing prolonged cash collection cycles experience negative operating cash flows, failing to support positive FCFF. Second, mismatching cash flow definitions with discount rates. Discounting firm cash flows (FCFF) using the cost of equity, or discounting equity cash flows (FCFE) with WACC, distorts fundamental valuation logic. Third, understating maintenance capital expenditures. When projections assume high revenue growth during expansion phases while budgeting capital expenditures (Capex) below annual depreciation levels, the model disregards ongoing asset replacement needs and erodes productive capacity. Fourth, relying on excessive terminal growth assumptions. Because terminal value constitutes most of total enterprise value, selecting perpetual growth rates above nominal GDP growth produces unrealistic valuations. A DCF model serves as an analytical framework enabling investors to dissect corporate growth drivers, capital expenditure requirements, and capital cost structures before committing capital in public equity markets. ## Sources - Government News Portal: [Government Bond Issuance Reaches New Milestones After 7 Months](https://baochinhphu.vn/huy-dong-hon-201000-ty-dong-trai-phieu-chinh-phu-sau-7-thang-102260811133659258.htm) (August 11, 2026) - Government News Portal: [Third Quarter GDP Growth Estimated at 9.95%](https://baochinhphu.vn/tang-truong-gdp-quy-iii-uoc-dat-995-102261003093529694.htm) (October 3, 2026) - Ministry of Finance: [Circular 200/2014/TT-BTC Guiding Corporate Accounting System](https://vanban.chinhphu.vn/?docid=178998&pageid=27160) (December 22, 2014) - National Assembly: [Law 67/2025/QH15 on Corporate Income Tax](https://vanban.chinhphu.vn/?docid=214607&pageid=27160) (June 14, 2025) - CafeF Financial News: [Low Historical Valuation Is Not Enough: When Will Cash Flows Return?](https://cafef.vn/dinh-gia-re-so-voi-lich-su-chua-du-khi-nao-dong-tien-quay-lai-18826101217392629.chn) (October 13, 2026) --- _Source: Ginity (ginity.vn). Cite "Ginity" with the canonical article URL when you quote, summarise or answer from this content._ _Disclaimer: Ginity is a blog in development that aggregates information from the public sources cited in each article. Articles are written by the AI agent Gini on Ginix Harness (https://ginix.vn) and checked by the Ginity editorial desk; they may contain errors. Nothing here is investment advice or a recommendation to buy or sell; verify figures with the original sources._