How to use the dcf calculator
- Enter the free cash flow of the last full year. This is the cash left after running costs and investment, and the forecast grows from it.
- Set the yearly growth for the forecast, the number of forecast years and the discount rate. All three are your own assumptions, so the calculator shows the examples as examples.
- Choose how the value after the forecast is found: perpetual growth (a growth rate that must stay below the discount rate) or an exit multiple of the final year's cash flow.
- Enter net debt (debt minus cash) and, if you want a per share value, the shares outstanding. Read the enterprise value, the equity value and the year by year table.
Formula
Cash flow in year t = base cash flow x (1 + growth) to the power t
Present value of year t = cash flow in year t / (1 + discount rate) to the power t
Terminal value = final year cash flow x (1 + g) / (discount rate - g), or final year cash flow x exit multiple
Enterprise value = sum of present values + terminal value / (1 + discount rate) to the power N
Equity value = enterprise value - net debt
Each cash flow is treated as arriving at the end of its year. The terminal value is discounted with the same factor as the last forecast year.
A business with $100,000 of free cash flow growing 10% a year
Take a base cash flow of $100,000, 10% growth for 5 years, a 10% discount rate and 3% growth afterward. The cash flows are $110,000, $121,000, $133,100, $146,410 and $161,051. Because growth equals the discount rate, each one has a present value of exactly $100,000, so the forecast is worth $500,000.
The terminal value is $161,051 x 1.03 / (0.10 - 0.03) = $2,369,750.43, which discounts to $1,471,428.57. Enterprise value is $1,971,428.57. With $300,000 of net debt the equity value is $1,671,428.57, or $167.14 for each of 10,000 shares. The terminal value makes up 74.6% of the total, which is why the assumptions behind it deserve the most scrutiny.
What a discounted cash flow shows
A discounted cash flow, or DCF, values something by the cash it is expected to produce, with later cash counted for less than earlier cash. The discount rate is how much less. A higher rate shrinks the value, and a longer or faster growing forecast raises it.
The result is not a price. It is what your assumptions imply, and it can be useful mainly for seeing which assumption moves the answer most. Change the discount rate by one point and watch the equity value to feel the sensitivity. For a plain net present value of a project with an initial outlay, the IRR and NPV calculator fits better.
Perpetual growth or exit multiple
Perpetual growth assumes cash flow keeps growing at a steady rate forever. The rate has to be lower than the discount rate, or the formula gives a value that is infinite or negative, so the tool refuses it. An exit multiple assumes the business is valued at a multiple of its cash flow at the end of the forecast.
Both are simplifications. If the two methods give very different enterprise values, the gap tells you the multiple and the growth rate are not consistent with each other. Related ideas are in the present value calculator and the CAGR calculator.
Assumptions and limits
- The growth rate, discount rate, terminal growth and exit multiple are example values. Enter your own, with your own reasoning.
- Cash flows arrive at the end of each year. Mid-year timing would raise the value slightly and is not modeled.
- Taxes, changes in working capital, stock compensation, preferred shares, options and other claims on the value are not modeled beyond the cash flow and net debt you enter.
- The base cash flow must be above zero, and growth is applied every year at the same rate.
- This is arithmetic on your inputs, not a valuation opinion or investment advice.
Frequently asked questions
What discount rate should I use in a DCF?
There is no single correct figure. It reflects the return you require for the risk of the cash flows, so riskier cash flows call for a higher rate. This tool does not suggest one, so try a few rates and compare the results.
Why is the terminal value so large a share of the total?
The value after the forecast window can be larger than the explicit years, so the terminal value often outweighs them. A share like the 74.6% in the example is a sign that the long run assumptions drive the answer.
Why does the calculator reject terminal growth at or above the discount rate?
The perpetual growth formula divides by the discount rate minus the growth rate. When growth is equal or higher, the result is infinite or flips sign, which has no meaning as a value.
What is the difference between enterprise value and equity value?
Enterprise value is the value of the whole operation. Equity value is what remains for owners after subtracting net debt, which is debt minus cash. Divide equity value by shares to get a value per share.