VALUATION METHOD · MANUAL EXAMPLE
A discounted cash flow valuation links an explicit forecast to a present-value estimate. Here we use unlevered free cash flow to the firm (FCFF), discount it at WACC, and keep the operating-asset calculation separate from the equity bridge. The distinction between FCFF and equity cash flow is explained in CFA Institute’s Free Cash Flow Valuation reading.
1. Define the cash flow, units and valuation date
Use cash flows available to debt and equity investors after operating expenses, tax and required reinvestment. Net income and EBITDA are not interchangeable with this measure. Keep every cash flow and balance-sheet adjustment in the same currency and scale. Record the historical financial periods separately from the date of any market-price comparison.
2. Build an explicit operating forecast
Forecast the drivers that matter to the business: volume, prices, customer counts or membership activity, plus margins and reinvestment. Explain which inputs come from filings or guidance and which are your own judgments. Our Excel template overview shows how these assumptions connect through four financial worksheets.
3. Discount the annual forecast
The calculator assumes cash flow arrives at each year end and a constant WACC. For year t:
Add those annual present values. Timing conventions and a changing discount rate can produce different results; this tool uses the simple end-of-year convention explicitly.
4. Estimate and discount the continuing value
The stable-growth perpetuity requires WACC greater than terminal growth g. Discount that terminal value back by (1 + WACC)N. Enterprise value is the present value of the forecast plus the present value of the terminal value. Examine how much of the answer depends on that continuing assumption.
5. Keep the equity bridge explicit
The optional calculator bridge uses only these two adjustments. A complete company valuation may also need preferred stock, minority interests and other claims or non-operating assets. Divide equity value by a consistently scaled share count to calculate value per share. Read the TSMC model’s TWD and Taiwan-share notes for an example of why currency and security basis matter.
6. Test the assumptions, not just the arithmetic
Vary WACC and terminal growth while holding the explicit cash-flow path constant. Then test operating assumptions in the workbook. A sensitivity table shows changes in a scenario, not probabilities or a recommendation to trade.
A fictional three-year example
This example uses invented teaching inputs in a single consistent monetary unit. It is not a company forecast or a market quote. Year-end cash flows are 100, 110 and 121; WACC is 10% and terminal growth is 3%.
| Output | Value |
|---|---|
| PV of three forecast cash flows | 272.73 |
| Terminal value at the end of year 3 | 1,780.43 |
| PV of terminal value | 1,337.66 |
| Enterprise value | 1,610.39 |
| Equity value with cash 50 and debt 200 | 1,460.39 |
| Value per share with 10 consistently scaled shares | 146.04 |
Open the DCF calculator and select “Use fictional example” to reproduce these numbers. Change one assumption and compare the annual present values and terminal contribution.
Move from the method to an Excel model
Get the free simplified Excel for a five-year learning exercise, or compare the 17 company models for an operating-driver framework and source annotations. Their valuation dates and forecasts belong to those editions. They are educational tools, with no guarantee of an investment return.