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πŸ’° Financial Models
Discounted Cash Flow (DCF)
The foundational intrinsic valuation method. Projects a company's future free cash flows (FCF), then discounts them to present value using WACC (the cost of capital). What *you* think the business is worth, independent of what the market says.
2
Minutes
7
Concepts
+15+30
Read+Quiz
1
How It Works
Unlevered FCF = EBIT Γ— (1 βˆ’ tax rate) + D&A βˆ’ CapEx βˆ’ Ξ”Working Capital
Terminal Value = FCF_n Γ— (1 + g) / (WACC βˆ’ g)       ← Gordon Growth Model
Enterprise Value = Ξ£(FCF_t / (1+WACC)^t) + TV / (1+WACC)^n
Equity Value = Enterprise Value βˆ’ Net Debt + Non-Operating Assets
Per Share Value = Equity Value / Diluted Shares Outstanding
Step-by-Step Walkthrough

1. Project free cash flows (5-10 years)

Build from revenue down:

Revenue                         (grow at X% per year)
βˆ’ Cost of Goods Sold            (% of revenue)
= Gross Profit
βˆ’ SG&A, R&D                    (% of revenue, declining toward maturity)
= EBIT (Operating Income)
Γ— (1 βˆ’ Tax Rate)               (tax-effected)
= NOPAT
+ Depreciation & Amortization  (non-cash, add back)
βˆ’ Capital Expenditures          (cash outflow for growth + maintenance)
βˆ’ Change in Working Capital     (cash tied up in A/R, inventory, less A/P)
= Unlevered Free Cash Flow

2. Calculate terminal value

Two approaches:

  • Gordon Growth Model: TV = FCF_n Γ— (1 + g) / (WACC βˆ’ g) β€” assumes FCF grows at g forever
  • Exit Multiple Method: TV = EBITDA_n Γ— Exit Multiple β€” more market-grounded

Most practitioners calculate both and cross-check. If they diverge significantly, investigate your assumptions.

3. Discount everything to present value

PV of FCF_t = FCF_t / (1 + WACC)^t
PV of TV = TV / (1 + WACC)^n
Enterprise Value = Sum of all PV(FCF) + PV(TV)

4. Bridge to equity value

Equity Value = Enterprise Value βˆ’ Total Debt + Cash + Investments βˆ’ Minority Interests
Per Share = Equity Value / Diluted Shares (include options via treasury stock method)