DCF Valuation Calculator
Value a business by discounting projected free cash flows and a terminal value, with a sensitivity grid across discount rate and growth, and a check on how much of the value is terminal.
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A company is worth the cash it will produce
Discounted cash flow valuation states that a business is worth the present value of the free cash it will generate for its owners. It is the only valuation method derived from first principles rather than from comparison, which is both its strength and the reason it is so easy to abuse: every input is a forecast, and small changes in the discount rate or the terminal growth rate move the answer enormously.
Most of the value is in the terminal value
A five year forecast followed by a terminal value typically puts sixty to eighty percent of the total in the terminal figure, which is calculated from a single growth assumption applied in perpetuity. That means the careful year by year modelling contributes a minority of the answer and the least defensible number contributes most of it. Any DCF where the terminal share exceeds about eighty five percent is really a statement about perpetual growth wearing a spreadsheet as a disguise.
Terminal growth cannot exceed the economy
A company growing faster than the economy forever eventually becomes the whole economy, so a perpetual growth rate above long run nominal GDP growth, roughly two to three percent in developed markets, is not a forecast but an arithmetic impossibility. The Gordon growth formula also divides by the difference between the discount rate and the growth rate, so as growth approaches the discount rate the terminal value approaches infinity. That sensitivity is why the grid matters more than the point estimate.
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Frequently Asked Questions
What cash flow should I discount?
Unlevered free cash flow, meaning operating profit after tax plus depreciation less capital expenditure and less the increase in working capital, discounted at the weighted average cost of capital. That gives enterprise value, from which you subtract net debt to get equity value.
What terminal growth rate is reasonable?
At or below long run nominal GDP growth, so roughly 2 to 3 percent in developed markets. Anything higher implies the company eventually becomes larger than the economy. Many practitioners use 0 to 2 percent to stay conservative.
How sensitive is the result?
Extremely. A one point change in the discount rate or terminal growth can move the valuation by twenty percent or more, because the terminal value divides by the gap between them. That is why a sensitivity grid is more informative than any single number.
What if the terminal value dominates?
It always does to some extent, typically 60 to 80 percent for a five year forecast. Above about 85 percent the valuation is essentially a perpetuity assumption, and extending the explicit forecast period or cross checking against an exit multiple is worthwhile.
Should I use an exit multiple instead?
The exit multiple method is common in private equity and is a useful cross check, but it imports current market pricing into a method meant to be independent of it. Running both and comparing is better practice than choosing one.
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How to Use
Enter starting free cash flow, growth assumptions, discount rate and terminal growth.
Disclaimer: This tool is provided "as is" without warranty of any kind. Results are for educational and utility purposes.
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