Microsoft's shares were worth about $3.7 trillion in late September 2026. A discounted cash flow, or DCF, asks what all of Microsoft's future cash is worth in today's money. The answer depends almost entirely on what you assume.
Below, we build a simple ten-year DCF of Microsoft step by step. Every input is shown, so you can see which ones move the answer most.
What is a DCF? A discounted cash flow values a business as the sum of all the cash it will produce in future, with each year's cash shrunk back to what it is worth today.
Future cash is worth less than cash now. Each year is divided down by a discount rate, usually the company's cost of capital (WACC).
Most of the answer comes from the years after the forecast ends. In our Microsoft example, 57% of the value sits there.
Small changes in growth or the discount rate swing the result a lot. Treat a DCF as a range, not one number.
Why a dollar later is worth less than a dollar now
A dollar today can be invested. A dollar promised in five years cannot be invested yet. It might not even arrive. So future cash is worth less.
The discount rate turns future cash into today's money. It is the yearly return investors want for taking the risk. At 9.7% a year, $100 received in five years is worth $62.95 today. That is $100 divided by 1.097 five times.
A DCF does this for every future year of a company's cash, then adds the results up.
Step 1: find the free cash flow
The cash that counts is free cash flow. It is the cash a business makes from its operations, minus what it spends on new buildings, equipment and data centres (capital spending). What is left could be paid to shareholders and lenders.
Free cash flow is not the same as profit. Profit comes from the income statement, which counts sales when they are made and spreads big costs over many years. We explain it in How to Read an Income Statement.
Source: Microsoft Form 10-K filings, fiscal 2016 to 2026
Microsoft's financial year ends on 30 June. In fiscal 2026, it made $182.9bn of cash from operations. It spent $116.0bn on capital spending, four times what it spent in fiscal 2023, as it built data centres for its cloud and AI services. That left $67.0bn of free cash flow.
This is the first lesson of any DCF. Operating cash rose 54% in two years, while free cash flow fell from $74.1bn to $67.0bn. The starting number depends on whether you think the spending is a one-off build or the new normal.
Step 2: forecast ten years, in two stages
Fast growth does not last forever. Rivals catch up. A bigger company finds it harder to grow quickly. So the forecast is split in two:
Stage 1, years 1 to 5: fast growth. We assume free cash flow grows 15% a year. It rises from $67.0bn to $134.7bn.
Stage 2, years 6 to 10: growth fades. It steps down evenly each year, from 12.5% in year 6 to 2.5% in year 10. Free cash flow reaches $192.9bn.
Source: Microsoft Form 10-K, fiscal 2026; YX Insights calculations
These are our assumptions for teaching, not a forecast of what Microsoft will do.
Step 3: choose the discount rate (WACC)
The discount rate is usually the weighted average cost of capital, or WACC. A company is paid for by two groups: shareholders and lenders. Each wants a return. WACC blends the two, weighted by how much of each the company uses.
Shareholders want more than lenders, because they are paid last and take more risk. Lenders' cost is cut by tax, because interest is tax-deductible. Microsoft's debt is only about 1% of its capital, so its WACC is close to its cost of equity.
We work out Microsoft's WACC step by step in What Is WACC?. It comes to 9.7%, which is the rate we use here.
Step 4: discount each year back to today
Year 1's $77.0bn is worth $70.2bn today. Year 10's $192.9bn is worth $76.4bn today. Added up, years 1 to 5 are worth $387bn today and years 6 to 10 are worth $418bn.
Step 5: add the terminal value
A company does not stop after year 10. The terminal value stands for every year after that, in one number. There are two ways to work it out.
Perpetual growth. Assume free cash flow grows at a steady rate forever. The formula is next year's cash flow divided by the discount rate minus that growth rate. We use 2.5%. The rate must stay at or below the long-run growth of the whole economy. Otherwise the company would one day be bigger than the economy. The size of the US economy (GDP) grew 4.5% a year from 2000 to 2025 before inflation, or 2.1% after it. Our 2.5% gives a terminal value of $2,746bn in year 10, or $1,088bn in today's money.
Exit multiple. Assume the business could be sold at the end of year 10 for a multiple of its cash flow. At 20 times year 10's free cash flow, the terminal value is $3,858bn. The value per share rises from $260 to $319.
The two methods check each other. A 20 times multiple sounds modest next to the 55 times free cash flow the market pays for Microsoft today. Yet at a 9.7% discount rate, it is the same as assuming 4.5% growth forever. Our 2.5% growth is the same as a multiple of about 14 times.
Source: Microsoft Form 10-K, fiscal 2026; YX Insights calculations
With perpetual growth, the terminal value is 57% of the total. Had we stopped the forecast after five years with the same inputs, it would be 76%. A longer forecast puts more of the value in years you can reason about. The terminal value still carries more than half.
Step 6: turn it into a value per share
The three parts add up to $1,893bn. That is the value of the business itself.
Shareholders also own the company's spare cash, while lenders are owed its debt. On 30 June 2026, Microsoft held $76.8bn of cash and short-term investments against $40.3bn of debt. Adding the $36.6bn difference gives $1,929bn for the shares.
Divided across 7.43bn shares, that is about $260 a share.
Compare it with the market price
Microsoft closed at about $498 a share on 24 September 2026. Our DCF says $260. The gap shows how much the answer depends on the inputs.
The table below shows the value per share for other stage 1 growth rates and discount rates. Stage 2 still fades evenly to 2.5%. Everything else stays the same. Our base case of $260 is in bold.
Discount rate | 10% growth | 15% growth | 20% growth | 25% growth | 30% growth |
|---|---|---|---|---|---|
8.7% | $233 | $306 | $399 | $518 | $670 |
9.7% | $199 | $260 | $337 | $436 | $562 |
10.7% | $174 | $225 | $291 | $375 | $481 |
Source: Microsoft Form 10-K, fiscal 2026; YX Insights calculations.
At a 9.7% discount rate, the price matches only if free cash flow grows about 28% a year for the first five years. Reading a DCF backwards like this is called a reverse DCF. It tells you what the current price assumes.
What a DCF is good for
A DCF will not give you the true value of a company. No model can. Its use is that it forces every assumption into the open: how fast cash grows, how long that lasts, how risky it is and what happens after the forecast.
Three things deserve the most care:
The starting cash flow. A year of heavy spending, or a one-off windfall, distorts everything that follows.
The discount rate. In our example, moving it one point either way shifts the value from $260 to anywhere between $225 and $306.
The terminal value. It usually carries most of the value. Keep its growth rate at or below the economy's. Check what any exit multiple implies.
Used this way, a DCF asks a question. What has to go right for this price to make sense?
This is a teaching example. It is not a price target or a recommendation.
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