Build discounted cash flow models with projected free cash flows, terminal value, WACC, and enterprise value calculation for stock valuation.
A DCF converts projected free cash flows into a value at the valuation date. Enter cash flows for the explicit forecast period, apply a WACC to discount each period, and include a terminal value for cash flows beyond the forecast. The discounted amounts are added to produce enterprise value. The most common misreading is treating enterprise value as equity value. Debt, excess cash, other non-operating items, and diluted shares must be handled separately before deriving a per-share value.
A concrete input and expected output from the current implementation.
Input
Year 1 free cash flow: $110 Year 2 free cash flow: $121 WACC: 10% Perpetual growth rate: 0%
Expected output
Terminal value at the end of Year 2: $1,210.00 Enterprise value: $1,200.00
The two forecast cash flows discount to $110 / 1.10 = $100 and $121 / 1.10^2 = $100. Terminal value is $121 / 0.10 = $1,210 at Year 2; discounting it by 1.10^2 gives $1,000, so enterprise value is $100 + $100 + $1,000 = $1,200.
Each projected free cash flow is divided by (1 + WACC) raised to its period number. A cash flow one year away receives one discount period, while a cash flow two years away receives two. Adding these present values measures the contribution of the explicit forecast to enterprise value.
Terminal value represents cash flows occurring after the explicit forecast. Under the perpetual-growth convention used in the example, it equals next-period free cash flow divided by WACC minus perpetual growth. Because that value is measured at the end of the forecast, it must also be discounted back before being added to the forecast cash flows.
That can occur when the explicit forecast covers only a few years while the terminal value represents all later cash flows. It is not automatically an error, but it makes the result especially sensitive to WACC and perpetual growth. Review the terminal assumptions and compare the implied terminal economics with the company's mature-state prospects.
No. Enterprise value measures the operating business before allocating value among debt holders, shareholders, and certain other claims. To estimate equity value, adjust for net debt and relevant non-operating assets or liabilities. A per-share estimate then requires an appropriate diluted share count.
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