Discounted Cash Flow (DCF) Calculator

Year-0 revenue $10,000,000, 10% annual revenue growth for 5 years, 25% operating margin, 21% tax rate, capex and depreciation both 5% of revenue, net working capital change 2% of revenue, WACC 9.5%, terminal growth 2.5%, net debt $8,000,000, 1,000,000 diluted shares outstanding.

Sum of the present value of the five projected years of free cash flow: ≈ $8,997,318.

Terminal value (Gordon Growth, applied to year-5 cash flow): ≈ $41,858,880, with a present value of ≈ $26,589,919.

Enterprise value: ≈ $8,997,318 + $26,589,919 ≈ $35,587,237. Notice the terminal value alone makes up roughly 75% of total enterprise value, which is typical for a DCF and a reminder of how sensitive these models are to terminal assumptions.

Equity value (subtracting net debt): $35,587,237 − $8,000,000 ≈ $27,587,237.

Implied share price: $27,587,237 ÷ 1,000,000 shares ≈ $27.59.

Discounted Cash Flow (DCF) analysis is a fundamental valuation methodology based on the principle that the value of a business is equal to the present value of its expected future cash flows.

Unlike market-based valuations such as trading multiples (e.g., P/E or EV/EBITDA), a DCF is an intrinsic valuation model. It allows analysts to project a company's operations through an explicit forecast period (typically 5 to 10 years) and discount those cash flows back to the present using an appropriate discount rate, representing the risk of the cash flows.

Unlevered Free Cash Flow (FCFF) represents the cash available to all capital providers (both debt and equity holders) after operating expenses, taxes, and capital investments have been met.

The mathematical formula for Unlevered Free Cash Flow is:

FCF = EBIT × (1 - t) + D&A - CapEx - ΔNWC

Where:

* EBIT is earnings before interest and taxes (operating income).

* t is the marginal corporate tax rate.

* D&A is non-cash depreciation and amortization expenses.

* CapEx is capital expenditures (reinvestment in fixed assets).

* ΔNWC is the change in net working capital (current assets minus current liabilities).

To determine the present value of future cash flows, they must be discounted by a rate that reflects the cost of capital. The Weighted Average Cost of Capital (WACC) is used as the discount rate for unlevered free cash flows.

The formula for discounting cash flow in year i is:

PV of FCF_i = FCF_i / (1 + WACC)^i

WACC blends the cost of equity (typically calculated using the Capital Asset Pricing Model, CAPM) and the after-tax cost of debt, weighted by their respective proportions in the company's target capital structure.

Since a company is assumed to operate indefinitely, cash flows beyond the explicit forecast period must be captured in a single figure known as Terminal Value (TV). Two methods are standard:

Gordon Growth Method: Assumes cash flows grow at a stable, long-term perpetual growth rate (typically matching long-term inflation or GDP growth, around 2% to 3%):

TV = (FCF_n × (1 + g)) / (WACC - g)

Where FCF_n is the cash flow of the final projected year, and g is the perpetual growth rate.

Exit Multiple Method: Assumes the business is sold at the end of the forecast period at an implied market multiple, such as EV/EBITDA. The terminal value is calculated as:

TV = EBITDA_n × Exit Multiple

Once the present value of projected cash flows and the terminal value are summed, we obtain Enterprise Value (EV). To determine the value available to equity holders (Equity Value), we bridge the two figures using net debt:

Equity Value = Enterprise Value - Debt + Cash - Minority Interest - Preferred Stock

The implied share price is then calculated by dividing the Equity Value by the diluted shares outstanding:

Implied Share Price = (Equity Value) / (Diluted Shares Outstanding)

If this valuation is feeding into a leveraged buyout, model the debt structure and exit returns with the LBO model, or if it's for an acquirer evaluating a deal, check the earnings impact with the M&A accretion/dilution calculator.