DCF calculator

A company generating $940,000 of free cash flow in year one, growing from 6% down to 3% over five years and discounted at a 12.4% WACC, has an enterprise value of $10,917,466 and an equity value of $8,817,466 after $2,100,000 of net debt. Of that enterprise value, $7,084,541, 64.9%, comes from a single terminal value figure covering everything after year five. Priced instead with a 6.0× exit multiple on terminal-year EBITDA, the terminal value comes out within 1.6% of the growth-based figure, and each method implies almost exactly the assumption the other one used.

The calculator projects free cash flow to the firm, computes terminal value both ways so you can check them against each other, adds the mid-year convention as an option, and carries the result from enterprise value to equity value.

Who reaches for this

You enter a starting free cash flow to the firm, a growth rate for each of five explicit years, a discount rate, and the terminal value assumptions: a terminal growth rate and an exit multiple, both at once, so the calculator can check them against each other. It discounts each explicit year's cash flow, computes both versions of terminal value, and shows enterprise value, its split between the explicit period and the terminal value, and equity value after net debt.

A DCF is a chain of several calculators joined together: the EBITDA calculator builds the starting cash flow, the WACC calculator builds the discount rate, and the present value calculator covers the discounting mechanics for a single payment. This page puts them together into one multi-year valuation.

Free cash flow to the firm is the cash a business generates after running itself and reinvesting in its own future, available to everyone with a claim on it: lenders and owners together. It is built from EBITDA in three steps: subtract cash taxes, subtract capital expenditures, and subtract any increase in working capital.

The example company, continuing from the EBITDA calculator's $12 million business, has $1,690,000 of EBITDA. After $220,000 of taxes, $380,000 of capital expenditures and a $150,000 increase in working capital, its FCFF is $940,000, a cash conversion of 55.6%. That is the starting figure this page projects forward. Using FCFF, and discounting it at WACC, keeps the valuation unlevered: it values the whole business before financing, and net debt is subtracted only at the very end to reach equity value.

The explicit period is however many years you feel comfortable forecasting in real detail, commonly five to seven. Growth rates typically start higher, reflecting current momentum, and taper toward the terminal growth rate as the forecast approaches the point where the business is assumed to have settled into a steady, sustainable state.

The sum of the five present values, $3,832,925, is only 35.1% of the eventual enterprise value. Getting the explicit years right matters, but it is not where most of the value comes from in this example, or in most DCFs of a business with several more years of useful life ahead of it.

Since no business can be forecast year by year forever, everything after the explicit period is collapsed into one terminal value at the end of year five. Two methods are standard, and this calculator computes both from the same terminal-year numbers so you can see whether they agree.

Gordon Growth (perpetuity)

Terminal value = final-year FCFF × (1 + terminal growth) ÷ (WACC − terminal growth). It treats the business, from year six onward, as a cash flow growing at a constant rate forever. With $1,159,936 of year-five FCFF, a 3% terminal growth rate and a 12.4% WACC: $1,159,936 × 1.03 ÷ (0.124 − 0.03) = $12,709,934. The formula requires WACC to exceed the growth rate, or the perpetuity is worth an infinite, meaningless amount.

Exit multiple

Terminal value = final-year EBITDA × an exit multiple drawn from comparable public companies or recent transactions in the same industry. Terminal-year EBITDA here is $1,159,936 ÷ 0.556 = $2,085,416 (backing FCFF out of an EBITDA margin), and at a 6.0× multiple, matching the one used in the EBITDA calculator's own example: $2,085,416 × 6.0 = $12,512,498.

The reconciliation

The two methods, $12,709,934 and $12,512,498, are within 1.6% of each other. That is not a coincidence built into the example; it comes from checking one against the other. The 6.0× multiple implies a terminal growth rate of about 2.9%, close to the 3% actually assumed. The 3% growth rate implies an exit multiple of about 6.1×, close to the 6.0× actually assumed. When the two methods roughly agree, and their implied assumptions roughly agree with what you actually assumed, that consistency is meaningful evidence, not proof, that the terminal value is reasonable.

When they diverge sharply, work out which one is really driving the disagreement: an exit multiple that implies an unrealistic growth rate, or a growth rate that implies an unrealistic multiple, are the same problem seen from two angles, and the crosswalk is what surfaces it. A calculator that shows only one method never gives you this check.

Multi-stage terminal growth

A single terminal growth rate is a simplification, and it is the standard one for a reason: estimating one long-run number is hard enough without adding several. Some models use a two- or three-stage approach instead, with an intermediate period of above-trend growth fading down to a lower, truly long-run rate before the perpetuity begins, which can matter for a fast-growing company not yet close to a steady state at the end of the explicit forecast. This calculator uses a single terminal rate applied after year five; if your explicit forecast already tapers growth down close to a sustainable level, as the example's does, ending at 3% by year five, a single-stage terminal value is a reasonable simplification, and the fix for a company still growing quickly at the end of year five is simply to extend the explicit forecast further before the terminal value begins.

It is also worth checking whether the terminal growth rate is achievable at all, given the business's own return on invested capital: sustainable growth is roughly ROIC times the share of profit reinvested, so a 3% terminal growth rate needs less than a full quarter of NOPAT reinvested at this company's return. The ROIC calculator works through that check on the same example company.

In the example, the present value of the terminal value is $7,084,541 out of $10,917,466 of total enterprise value: 64.9%. That figure sits inside the 60% to 80% range often quoted for DCFs, though I could not trace that specific range to a primary source, and it is exactly the kind of claim this calculator lets you verify for your own numbers instead of taking on faith.

A high terminal value share is not a flaw in the model; it is close to unavoidable for a business expected to keep operating well past the explicit forecast. It does mean the explicit forecast years, however carefully built, are not where the real disagreement in a DCF usually lives. Two analysts who agree closely on next year's revenue and margin can still land far apart on value if they disagree on the terminal growth rate or the exit multiple. Put the scrutiny where the value actually is.

The standard discounting formula assumes every year's cash flow arrives in one lump sum on the last day of that year. Real businesses collect cash throughout the year, so a cash flow that actually arrives, on average, around the middle of the year is worth more today than the standard formula gives it credit for, since it is not sitting unused for the second half of the year waiting to be counted.

The mid-year convention corrects this by discounting each year's cash flow, and the terminal value, using an exponent reduced by half a year: year one uses 0.5 instead of 1, year five uses 4.5 instead of 5. In the example, switching it on raises enterprise value from $10,917,466 to $11,574,574, an increase of $657,108, about 6%. It is a small, mechanical adjustment, and skipping it when cash genuinely arrives throughout the year understates value by a similar margin every time.

Enterprise value belongs to everyone with a claim on the business, lenders included. To find what belongs to the owners, subtract net debt: interest-bearing debt minus cash. In the example, $10,917,466 of enterprise value less $2,100,000 of net debt leaves $8,817,466 of equity value.

For a public company, dividing equity value by the number of shares outstanding gives an implied value per share, which can be compared with the current market price. For a private business, equity value is the figure a buyer of the whole company would be paying for, before any negotiation on top of the model, and it is worth comparing against a second method, such as the business valuation calculator's SDE multiple, as a sanity check.

Because the terminal value is a ratio with the discount rate and the growth rate both sitting in the denominator's difference, small changes in either one move the answer by a large percentage. The sensitivity table below holds the FCFF projection fixed and varies WACC and the terminal growth rate around the example's assumptions.

Moving WACC from 11.4% to 13.4%, holding the 3% growth rate fixed, takes enterprise value from $12,222,076 down to $9,863,842, a swing of roughly 24% for a two-point change in a rate that is itself an estimate with real uncertainty. That is inherent to how a perpetuity is calculated, not a mistake in this particular model, and it is the reason a DCF is best presented as a range across a few reasonable assumptions rather than a single confident number.

Comparing the DCF against the IRR the market is pricing in

A DCF answers what a business is worth given a set of assumptions. It can also be run in reverse: given a known price, what discount rate makes the DCF's value equal that price is the internal rate of return the market is implicitly pricing in. If the example company traded at an enterprise value of $9,000,000, well below the $10,917,466 the DCF estimates at a 12.4% WACC, that gap says either the market is demanding a higher return than 12.4% to hold the business, or it disagrees with the growth and margin assumptions behind the forecast. The IRR calculator can solve for that implied rate directly from the same cash flow schedule, which is a useful way to translate a price disagreement into a rate disagreement, a language easier to argue about than a single dollar figure.

A DCF works best for a business whose future cash flows can be forecast with some confidence: an established company with a reasonably predictable operating model, even if it is still growing. It works poorly for an early-stage business with no real revenue history, where a five-year cash flow forecast is closer to a guess than a projection, and for a business whose value depends heavily on optionality that a straight-line cash flow forecast cannot capture.

For a smaller, owner-operated business where the owner's own labor is a large part of the earnings, and multi-year cash flow forecasting is impractical, the business valuation calculator's seller's discretionary earnings multiple is usually the more practical tool. Many valuations use both a DCF and a multiple-based method side by side and treat the gap between them as useful information about how much the DCF's growth and margin assumptions are really driving the number.

Sourcing an exit multiple honestly

An exit multiple carries as much weight as it looks like it should not: it is one number multiplied by terminal-year EBITDA, and that product is usually the largest single figure in the whole model. The defensible way to source one is from actual recent transactions in the same industry and size range, or from the trading multiples of genuinely comparable public companies, adjusted for differences in growth, margin and risk between them and the business being valued. A multiple pulled from a generic online table, sorted only by broad industry category, is a starting guess at best, and the implied-growth crosswalk on this page is a quick way to test whether that guess is even internally consistent with the rest of the model before relying on it further.

Build the discount rate this page uses with the WACC calculator, or start from the cash flow this page projects with the EBITDA calculator.