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What This Calculator Does
This calculator performs a professional multi-period DCF valuation. It projects free cash flows using a growth rate, calculates terminal value via the perpetual growth method, and discounts all cash flows back to present value using WACC.
How to Use This Calculator
Enter current year free cash flow, expected annual growth rate, WACC / discount rate, terminal growth rate, projection years, and net debt. Click Calculate to view the intrinsic firm value.
How the Calculation Works
The underlying math engine processes your inputs using exact formulas. This systematic approach ensures professional, institutional-grade calculation precision:
Mathematical Formula
Formula Legend:
- · FCF_t = Free Cash Flow in year t.
- · WACC = Weighted Average Cost of Capital (discount rate).
- · Terminal Value = Projected value of the cash flows beyond the forecast horizon (Gordon Perpetual Growth).
Practical Example
A company generates $1,000 in Free Cash Flow this year, growing at 5.0% for 5 years. WACC is 8.0%, and the perpetual terminal growth rate is 2.5%:
Step-by-Step Mathematical Walkthrough:
- 1 Forecast FCF: Y1=$1,050, Y2=$1,102.50, Y3=$1,157.63, Y4=$1,215.51, Y5=$1,276.28.
- 2 Discount FCFs to PV: Total PV of 5-year FCFs = $4,475.20.
- 3 Calculate Terminal Value at Year 5: TV = [Y5 * (1 + 2.5%)] / (8.0% - 2.5%) = $1,308.19 / 0.055 = $23,785.27.
- 4 Discount Terminal Value to PV: $23,785.27 / (1.08)^5 = $16,187.80.
- 5 Sum of PVs: $4,475.20 + $16,187.80 = $20,663.00.
- 6 The intrinsic DCF value is $20,663.00.
Important Assumptions & Notes
- Free cash flows grow at the constant growth rate during the discrete forecast period.
- The perpetual terminal growth rate must be less than WACC / discount rate to converge.
- Net debt is subtracted from enterprise value to determine total equity value.
Common Mistakes or Considerations
- Setting a terminal growth rate higher than the long-term growth rate of the overall economy (typically 2% to 3%).
- Using a discount rate that is too low, which artificially inflates the calculated intrinsic value.
Frequently Asked Questions
What is a Discounted Cash Flow (DCF) model?
A DCF model is a valuation method used to estimate the value of an investment based on its future cash flows, discounted back to the present using an appropriate discount rate.
What is WACC in a DCF model?
WACC (Weighted Average Cost of Capital) is the discount rate representing a company's average cost of financing from both debt and equity. It is used to discount cash flows.
Why is Terminal Value so important in DCF?
Terminal Value represents the value of cash flows beyond the discrete projection period (often 5-10 years). It frequently accounts for 60% to 80% of the total DCF valuation.
What is Perpetual Terminal Growth Rate?
This is the constant rate at which the company's cash flows are assumed to grow forever after the discrete projection period. It is usually set in line with long-term inflation or GDP growth (2% to 3%).
What does it mean if DCF value is higher than current stock price?
It suggests the stock may be undervalued in the market, providing a margin of safety for a potential buy.