A discounted cash flow valuation estimates intrinsic value from the cash a business is expected to generate. Project free cash flow to the firm, set a terminal growth rate and discount at WACC to derive enterprise value, equity value and value per share.
How it works
Value a business by discounting projected free cash flow to the firm and a Gordon-growth terminal value at the weighted average cost of capital.
FCFₜ = FCF₀ × (1 + g)ᵗ
PV = Σ FCFₜ ÷ (1 + WACC)^(t − c), c = 0.5 for mid-year, else 0
Terminal value = FCFₙ × (1 + g_T) ÷ (WACC − g_T), discounted n years
Equity value = Enterprise value − Net debtCommon uses
- Business and equity valuation
- Acquisition pricing and fairness analysis
- Testing market-implied expectations
Worked example
The calculator above opens with this example. Change any input to see the results update instantly, or select Reset to return to these figures.
| Base-year free cash flow | $12,500,000 |
| Growth rate, forecast period | 8% |
| Forecast years | 5 years |
| Discount rate (WACC) | 9.5% |
| Terminal growth rate | 2.5% |
| Discounting convention | End of year |
| Net debt (debt − cash) | $35,000,000 |
| Shares outstanding | 10,000,000 |
| Enterprise value | $230,815,760 |
| Equity value | $195,815,760 |
| Value per share | $19.58 |
| PV of forecast cash flows | $59,977,941 |
| PV of terminal value | $170,837,820 |
| Implied terminal FCF multiple | 14.64× |
Interpreting the results
- Terminal growth should not exceed long-run nominal GDP growth (typically 2–3%).
- Mid-year convention assumes cash arrives evenly through each year and raises value modestly.
- Stress-test WACC ±1% and terminal growth ±0.5%; report a range rather than a single point.
Frequently asked questions
What terminal growth rate should I use?
Terminal growth should not exceed long-run nominal economic growth, which is why most practitioners use roughly 2% to 3%. The rate must also be well below WACC, or the terminal value becomes unrealistically large.
Why does terminal value dominate a DCF?
Terminal value captures every year beyond the explicit forecast, so it commonly represents 60% to 80% of enterprise value. Always test sensitivity to WACC and terminal growth, and cross-check against an exit multiple.
What is the mid-year convention?
The mid-year convention discounts each year’s cash flow as if received at mid-year rather than year-end, reflecting that cash arrives throughout the year. It modestly increases value relative to end-of-year discounting.
Related calculators
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- Comparable Company Multiples Valuation: Implied enterprise value, equity value and share price from peer multiples.
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