Discounted cash flow valuation

Discounted cash flow valuation (DCF) estimates what an asset or business is worth today by adding up the present values of its expected future cash flows. Each forecast is discounted from its payment date at a rate that reflects its risk. For an equity analyst, DCF translates a view about operations and reinvestment into a value estimate and shows how much of it rests on cash flows far in the future. Aswath Damodaran, NYU Stern, Approaches to Valuation

The discount rate must also match the forecast currency and inflation basis. Discount nominal USD forecasts with a nominal USD rate and real USD forecasts with a real USD rate. An annual effective rate applies once per year in the example below. Damodaran, Discounted Cash Flow Valuation, slide 149

Let $C_t$ be expected FCFF at the end of year $t$, with an explicit forecast through year $N$ and a constant annual effective WACC $r$. The terminal value $TV_N$ puts the cash flows from year $N+1$ onward in year-$N$ terms. Today’s enterprise value is

Discount both the year-two cash flow and the terminal value over two years. The year-two cash flow appears once. If the company has 5 of excess cash outside the operating forecasts and debt with a current market value of 30, with no other assets or claims to adjust for, common equity is worth $123.14+5-30=98.14$ million in this scenario. Using net debt of 25 gives the same result. A direct FCFE valuation already accounts for debt cash flows, so subtracting debt again would double-count the debt claim. Damodaran, Getting to Equity Value per Share

One possible assumption is FCFF of 12.60 million at the end of year three and the same amount every year thereafter. More generally, if FCFF grows at a constant rate $g$ from the first post-forecast payment onward, the Gordon growth model gives

Here $12.60/0.10=126$ at the end of year two. The numerator uses the first cash flow after the explicit forecast. With positive gross growth and discount factors, $r>g$ ensures the series converges. Both rates are annual and nominal in this example. Damodaran, Closure in Valuation, slides 136–139

In the base case, the terminal component makes up about 85% of enterprise value. With WACC still at 10%, raising perpetual growth from 0% to 2% while holding year-three cash flow fixed raises enterprise value to 149.17 million. The higher estimate comes entirely from years four onward. In a business forecast, sustaining faster growth can require more reinvestment, which can reduce free cash flow. The chart isolates the effect of the growth assumption. Damodaran, Going Concern or Terminal Value

For the same timing logic from the shareholder’s side, the SelfMadeQuant lesson works through the dividend discount model for a share with constant dividend growth. See the Gordon growth formula and its single-stage sensitivity example. The page is a public preview, with the full lesson available to members. Equity Valuation — Dividend Discount and DCF Models