Discounted cash flow

How it works

Free cash flow grows at your first rate for years 1 to 5 and at your second rate for years 6 to 10. Each year's flow is discounted to today at the discount rate. After year 10 the flows are assumed to grow forever at the terminal rate, valued with the Gordon growth formula and discounted from year 10. The sum is the enterprise value; taking off net debt gives the equity value, and dividing by the shares gives a value per share. The solid line is each year's cash flow, the dashed line and the shaded area its value today.

Assumptions

The terminal growth rate must be below the discount rate, and small changes in either move the value a lot: try them. Cash flows arrive at each year end. No dilution, tax changes or reinvestment needs beyond what the free cash flow already nets out. A sketch of the method, not a valuation of any company.

For information and education only. Not investment advice.