Company valuation
This worked example takes a simplified DCF valuation from the forecast phase all the way to enterprise value.
Starting point
Assume a company with free cash flow of €1,000,000 in the last historical year, a WACC of 8% and a five-year forecast period with 5% annual cash-flow growth.
Forecast phase
| Year | FCF | Present value (8% WACC) |
|---|---|---|
| 1 | €1,050,000 | €972,222 |
| 2 | €1,102,500 | €944,984 |
| 3 | €1,157,625 | €918,815 |
| 4 | €1,215,506 | €893,404 |
| 5 | €1,276,282 | €868,716 |
The five present values add up to approximately €4,598,141, the value of all explicit forecast years.
Terminal value
The company does not simply stop existing after year five. We therefore calculate terminal value with a simplified perpetual-growth formula, using a moderate long-term growth rate of 2%.
Result
In this example, terminal value makes up more than three quarters of enterprise value. With short forecast periods, the result therefore depends heavily on the long-term growth rate and WACC.
Reading the result
The five forecast years together are worth just under €4.6 million, while discounted terminal value is about €14.8 million. That is not automatically wrong: the company is expected to keep generating cash after year five. But most of the calculated value comes from a period we did not model year by year.
The 2% growth rate describes long-term free-cash-flow growth after the forecast. It needs to fit a mature company. No company can grow faster than the economy for decades without eventually taking market share from elsewhere. If value is almost entirely explained by terminal value, inspect long-term growth, target margin and WACC first.
Sensitivity
A real valuation needs more than a base case. Add at least a cautious and an optimistic case by changing forecast growth, WACC or terminal growth.
The sensitive input depends on the company. Target margin may dominate for a young growth company; WACC may matter more for a mature one. Sensitivity shows which assumption needs the strongest justification.
Typical errors
The most common problem is not arithmetic but a vague assumption. Revenue grows quickly, margins rise, investment stays low and WACC is set small. Each assumption may look plausible on its own; together they can require perfect conditions.
Do not confuse enterprise value with equity value. A company DCF first gives the value of the operating business. Debt and excess cash must then be considered before arriving at the value for shareholders. Shares outstanding and possible dilution also matter.
The purpose of this example is not to value a share to the nearest euro. It is to show which number comes from which step and where your own judgement enters the model.
Checks
A DCF can be formally correct and still be a poor valuation. Check whether the last historical free cash flow is a normal starting point. A one-off contract can make the forecast too high; a crisis year can make it too low. Then compare growth with margin, working capital and investment. If revenue grows strongly while free cash flow rises without further investment, the assumption needs an explanation.
A useful check is to solve the valuation backwards: which growth rate or target margin would be required to reach the current market price?
Reverse calculation
Set the current market price as the target and ask which assumptions are needed to reach it. Perhaps free cash flow must grow at double-digit rates for ten years, long-term margins must exceed their historical level or WACC must be very low. The calculation does not tell you the right answer, but it reveals the future already implied by the price.
Compare that implied future with the business model. Is there a concrete reason for the growth, or only hope? See Reverse DCF: which expectations are already priced in?
Enter historical data and a forecast, then calculate WACC and terminal value automatically.
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