DCF Parameters

Typical range: 5-10 years
Values in $ millions
%
Weighted average cost of capital
%
Should not exceed long-term GDP growth (~2-3%)
$ M
Total interest-bearing debt ($ millions)
$ M
Cash and short-term investments ($ millions)
M
Diluted shares outstanding (millions)
DCF Valuation Formula
EV = Σ FCFFt / (1+WACC)t + TV / (1+WACC)n
EV = Enterprise Value | FCFF = Free Cash Flow to Firm | WACC = Discount Rate | TV = Terminal Value | n = Projection Years
Ryan O'Connell, CFA
Calculator by Ryan O'Connell, CFA

Valuation Results

PV of Projected FCFs --
Terminal Value --
PV of Terminal Value --
Enterprise Value --
Equity Value --
Implied Share Price --
TV as % of EV --

Step-by-Step Calculation

EV = Σ FCFFt / (1+WACC)t + TV / (1+WACC)n
Discounted Cash Flow Valuation (Berk Chapter 10)
Model Assumptions
  • Cash flows represent Free Cash Flow to the Firm (FCFF), discounted at WACC
  • Terminal value uses the Gordon Growth Model (perpetuity with constant growth)
  • WACC is constant across all projection years
  • Free cash flows occur at end of each year (no mid-year convention)
  • Terminal growth rate should not exceed long-term GDP growth (~2-3%)
  • Equity bridge is simplified — excludes preferred stock, minority interest, leases, and other non-operating assets
  • All inputs (cash flows, WACC, terminal growth) must be on the same nominal/real basis
  • Debt and cash values are at book value

For educational purposes. Not financial advice. Market conventions simplified.

Understanding Discounted Cash Flow (DCF) Valuation

What Is a DCF Analysis?

A discounted cash flow (DCF) analysis is a fundamental valuation method that estimates the intrinsic value of a company based on its expected future free cash flows to the firm (FCFF). By discounting these cash flows at the weighted average cost of capital (WACC), the model determines what those future cash flows are worth in today's dollars. This approach, detailed in Berk Chapter 10, is the cornerstone of corporate valuation in investment banking and equity research.

The Equity Bridge: From Enterprise Value to Share Price

Enterprise value (EV) represents the total value of a company's operations. To determine what equity holders actually own, we apply the equity bridge: Equity Value = EV - Total Debt + Cash. This simplified bridge removes the claims of debt holders and adds back liquid assets. Dividing equity value by diluted shares outstanding gives the implied share price. Note that a full banking-style bridge would also adjust for preferred stock, minority interests, and other items.

Terminal Value and the Gordon Growth Model

Since we cannot project cash flows indefinitely, the terminal value captures all value beyond the projection period. Using the Gordon Growth Model: TV = FCFFn × (1 + g) / (WACC - g). The terminal growth rate (g) should reflect sustainable long-term growth, typically matching GDP growth of 2-3%. Terminal value often represents 60-80% of total enterprise value, making the growth rate and WACC assumptions critical to the final valuation.

FCFF vs. FCFE: Choosing the Right Cash Flow

This calculator uses Free Cash Flow to the Firm (FCFF), which represents cash available to all capital providers (debt and equity holders). FCFF is discounted at WACC to determine enterprise value. The alternative approach uses Free Cash Flow to Equity (FCFE), discounted at the cost of equity to arrive at equity value directly. The FCFF/WACC approach is most common in practice because it separates operating performance from capital structure decisions.

Frequently Asked Questions

A DCF analysis estimates the intrinsic value of a company by projecting its future free cash flows to the firm (FCFF) and discounting them back to present value using the weighted average cost of capital (WACC). The model adds a terminal value to capture cash flows beyond the projection period, then subtracts debt and adds cash to arrive at equity value. Dividing by shares outstanding gives the implied share price. DCF is widely used in investment banking, equity research, and corporate finance because it values a company based on its fundamental cash-generating ability rather than market sentiment.

Terminal value captures the value of all free cash flows to the firm (FCFF) beyond the explicit projection period. The most common approach is the Gordon Growth Model: TV = FCFFn × (1 + g) / (WACC - g), where FCFFn is the final projected free cash flow, g is the perpetual growth rate, and WACC is the discount rate. The terminal growth rate should not exceed long-term GDP growth (typically 2-3%) because no company can grow faster than the economy indefinitely. An alternative method uses exit multiples (e.g., EV/EBITDA), but this calculator uses the Gordon Growth approach per Berk Chapter 10.

Terminal value frequently represents 60-80% of total enterprise value because it captures an infinite stream of cash flows beyond the projection period. A short projection period (e.g., 5 years) means most of the company's value lies in the terminal value. This is why DCF results are highly sensitive to the terminal growth rate and discount rate assumptions. Analysts can reduce terminal value dominance by extending the projection period (e.g., 10-15 years) or using more conservative growth assumptions. When TV exceeds 80% of EV, results should be interpreted with extra caution.

The appropriate discount rate for a firm-value DCF model is the weighted average cost of capital (WACC), which blends the cost of equity and the after-tax cost of debt weighted by the company's capital structure. WACC typically ranges from 6-12% for established companies and can exceed 15% for high-risk ventures. The cost of equity is commonly estimated using CAPM: Ke = Rf + β × (Rm - Rf). A higher WACC reduces the present value of future cash flows, resulting in a lower valuation. Use our WACC Calculator for a detailed WACC computation.

Enterprise value (EV) represents the total value of a company's operations. To convert to equity value: Equity Value = EV - Total Debt + Cash & Equivalents. This simplified equity bridge removes the claims of debt holders and adds back liquid assets available to equity holders. It excludes items like preferred stock, minority interest, and other non-operating assets by design. Dividing equity value by diluted shares outstanding gives the implied share price. If the implied price exceeds the current market price, the stock may be undervalued; if below, it may be overvalued.

Free Cash Flow to the Firm (FCFF) represents cash available to all capital providers (debt and equity holders) and is discounted at WACC to determine enterprise value. Free Cash Flow to Equity (FCFE) represents cash available only to equity holders (after debt payments) and is discounted at the cost of equity to determine equity value directly. This calculator uses the FCFF/WACC approach, which is the most common in practice because it separates operating performance from capital structure decisions. Use our FCF Calculator to compute FCFF from income statement items.
Disclaimer

This calculator is for educational purposes only and uses a simplified DCF model based on Berk Chapter 10. Actual valuations require detailed financial modeling, sensitivity analysis, and professional judgment. The equity bridge excludes preferred stock, minority interest, and other non-operating items. This tool should not be used for investment decisions.

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