DCF Valuation Model

Cover

Professional cover with company name, ticker, analysis date, and key conclusions. Covers company identification, implied share price summary and analysis date and analyst.

Assumptions

Central assumptions driving revenue growth, margins, working capital, and capital structure. Covers revenue growth trajectory, operating margin targets, working capital assumptions, capital expenditure plans and terminal growth rate.

Historical Financials

Clean historical income statement, balance sheet, and cash flow data for trend analysis. Covers 3-5 years of historical data, normalized adjustments, historical margin trends and growth rate calculations.

Income Statement

Projected income statement from revenue through net income. Covers revenue projections, margin expansion/contraction path, interest and tax calculations and eps projection.

Balance Sheet

Projected balance sheet with working capital, fixed assets, and capital structure. Covers working capital forecast, pp&e and intangibles, debt and equity projections and balance sheet integrity.

Cash Flow Statement

Projected cash flows reconciling net income to free cash flow. Covers operating cash flow, capital expenditures, working capital changes and free cash flow derivation.

Working Capital

Detailed working capital projection based on days outstanding assumptions. Covers dso, dio, dpo projections, net working capital change, cash conversion cycle and working capital as % of revenue.

Depreciation & Capex

Capital expenditure and depreciation schedules with asset roll-forward. Covers maintenance vs. growth capex, depreciation by asset class, capex as % of revenue and net pp&e projection.

WACC

Weighted average cost of capital calculation with cost of equity (CAPM) and cost of debt. Covers risk-free rate, equity risk premium and beta, cost of equity (capm), after-tax cost of debt and capital structure weights.

DCF Valuation

Core valuation sheet discounting projected free cash flows and terminal value to present value. Covers unlevered free cash flow projection, terminal value (gordon growth & exit multiple), present value calculation, enterprise value bridge to equity value and implied share price.

Sensitivity

Tests how changes in WACC, terminal growth, and margins affect the implied share price. Covers wacc vs. terminal growth table, wacc vs. exit multiple table, revenue growth sensitivity and margin sensitivity.

Football Field

Visual summary comparing the DCF-implied valuation range with other methodologies. Covers dcf range (sensitivity-based), comparable company trading range, precedent transaction range and football field chart.

Error Check

Comprehensive model validation ensuring formula integrity and balance sheet accuracy. Covers balance sheet balance check, cash flow reconciliation, wacc component validation and growth rate reasonableness.

Enterprise Value (DCF)

EV = Σ FCFₜ/(1+WACC)ᵗ + TV/(1+WACC)ⁿ

Sum of discounted free cash flows plus the discounted terminal value. The fundamental DCF equation.

WACC

WACC = (E/V)×rₑ + (D/V)×rᵈ×(1−t)

Weighted average cost of capital blending the cost of equity and after-tax cost of debt based on the target capital structure.

Terminal Value (Gordon)

TV = FCFₙ₊₁ / (WACC − g)

Terminal value using the perpetuity growth method, where g is the long-term sustainable growth rate (typically 2-3%).

Unlevered Free Cash Flow

UFCF = EBIT(1−t) + D&A − CapEx − ΔWC

Cash flow available to all capital providers (debt and equity), before any financing costs. The cash flow discounted in a DCF.

1.Project Free Cash Flows from a Solid Operating Model

A DCF is only as good as the cash flow projections it discounts. Start with a detailed operating model that builds revenue from identifiable drivers, projects operating costs with realistic margin assumptions, and accounts for working capital needs and capital expenditures. The explicit forecast period should be 5-10 years — long enough to capture the business reaching a steady state but short enough that your assumptions remain defensible. Focus on unlevered free cash flow (UFCF), which strips out financing effects and represents cash available to all capital providers.

2.Calculate the Weighted Average Cost of Capital

WACC represents the blended required return of all capital providers, weighted by their proportion in the capital structure. The cost of equity is estimated using the Capital Asset Pricing Model (CAPM): risk-free rate plus beta times the equity risk premium. The cost of debt is the after-tax borrowing rate. Getting WACC right matters enormously — a 1% change in the discount rate can swing the valuation by 15-25%. Use a peer-derived beta, a normalized risk-free rate, and a capital structure that reflects the target's long-term financing mix rather than its current leverage.

3.Estimate Terminal Value with Discipline

Terminal value typically represents 60-80% of total enterprise value in a DCF, which means the assumptions behind it deserve extraordinary care. The perpetuity growth method (Gordon Growth Model) discounts a normalized cash flow growing at a constant rate forever. The terminal growth rate should not exceed long-term GDP growth — a company cannot grow faster than the economy indefinitely. Cross-check your terminal value against an exit multiple approach and ensure the implied metrics are reasonable.

4.Discount Cash Flows and Bridge to Equity Value

Discount each year's UFCF and the terminal value back to present using WACC. Use mid-year convention if cash flows are generated throughout the year rather than at year-end. The sum gives you enterprise value. To arrive at equity value per share, subtract net debt (total debt minus cash), subtract minority interests, add associate values, and divide by diluted shares outstanding. Each bridge item should be at fair market value, not book value, for publicly traded companies.

5.Sensitize and Triangulate the Valuation

Never present a DCF as a single number — always show a range. Build sensitivity tables around the two most impactful assumptions: WACC and terminal growth rate (or exit multiple). The resulting valuation matrix shows the plausible range of fair values. Then triangulate your DCF against comparable company trading multiples and precedent transaction multiples. If your DCF implies a dramatically different valuation than market-based methods, investigate why — either you've found a mispricing, or your assumptions need revisiting.