How does a DCF valuation work?
A discounted cash flow (DCF) valuation says a business is worth the cash it will produce, brought back to today's money. It takes five steps:
- Project free cash flow for a number of years: the cash left after running the business and investing in it.
- Discount each year's flow at your required return: present value = cash flow / (1 + r)^t.
- Add a terminal value for every year after the last one, discounted the same way.
- Subtract net debt to move from the value of the whole business, the enterprise value, to the value of the shares.
- Divide by the shares outstanding.
With the default inputs, five years of free cash flow from $100 million to $132 million, a 9% discount rate and 2.5% long-term growth, the enterprise value is $1,798.71 million. Less net debt of $200 million and divided by 50 million shares, that is $31.97 a share. Every input is your assumption, so the answer is an estimate built from them.
The DCF formula, year by year
Each flow is assumed to arrive at the end of its year. The discount factor for year t is 1 / (1.09)^t at a 9% rate:
| Year | Free cash flow ($m) | Discount factor at 9% | Present value ($m) |
|---|---|---|---|
| 1 | 100 | 0.9174 | 91.74 |
| 2 | 108 | 0.8417 | 90.90 |
| 3 | 116 | 0.7722 | 89.57 |
| 4 | 124 | 0.7084 | 87.84 |
| 5 | 132 | 0.6499 | 85.79 |
| Terminal value | 2,081.54 | 0.6499 | 1,352.86 |
| Enterprise value | 1,798.71 |
The five years add up to $445.85 million from unrounded factors (the rounded column sums to $445.84). The terminal value is 132 x 1.025 / (0.09 - 0.025) = $2,081.54 million at the end of year 5, which the year-5 factor brings back to $1,352.86 million. Open Show the working under the result to see the same steps with your numbers.
Terminal value: Gordon growth or an exit multiple
A forecast has to stop somewhere, and the terminal value stands in for everything after it. The calculator offers two ways to set it:
- Gordon growth: the final year's cash flow grows forever at g, so TV = FCF in year N x (1 + g) / (r - g). It only works when r is above g; as g approaches r the value runs toward infinity, and the calculator stops you there.
- Exit multiple: TV = final-year figure x a multiple. Here the multiple applies to the final year's free cash flow. Multiples quoted on EBITDA need an EBITDA forecast instead, which you can turn into a free cash flow multiple yourself.
On the default flows, a 2.5% growth rate gives a terminal value of $2,081.54 million and $31.97 a share. A 12x multiple of the year-5 cash flow gives $1,584 million and $25.51 a share. Neither is more right than the other; it helps to check what growth rate a chosen multiple implies, and the other way round.
Why the terminal value is most of a DCF
On the default inputs the discounted terminal value is $1,352.86 million of an enterprise value of $1,798.71 million: 75.2% of the answer comes from years the forecast never shows. With the exit multiple it is 69.8%. The calculator reports this share under every result and adds a note when it passes three quarters.
The share is high because the terminal value covers every year after the forecast, while the forecast covers only five. Projecting more years moves value out of the terminal value and into the explicit flows, but it does not make the long-term assumption go away. Treat the terminal value share as a measure of how much of the result rests on one number.
How the discount rate and growth rate move the value
A higher discount rate lowers the value, and a higher long-term growth rate raises it. The sensitivity table under the result shows how fast. For the default cash flows, value per share at each pair of rates is:
| Discount rate | g 1.5% | g 2.0% | g 2.5% | g 3.0% | g 3.5% |
|---|---|---|---|---|---|
| 7% | $40.16 | $43.82 | $48.30 | $53.89 | $61.09 |
| 8% | $33.22 | $35.71 | $38.65 | $42.18 | $46.49 |
| 9% | $28.14 | $29.92 | $31.97 | $34.37 | $37.21 |
| 10% | $24.25 | $25.58 | $27.08 | $28.80 | $30.78 |
| 11% | $21.19 | $22.21 | $23.34 | $24.62 | $26.07 |
Across two points either side of the 9% discount rate and one point either side of the 2.5% growth rate, the value per share runs from $21.19 to $61.09, almost three times as much. The effect is strongest where the discount rate and growth rate are close together, in the top right corner. Switch the terminal value to an exit multiple and the columns become multiples instead.
From enterprise value to value per share
Discounting free cash flow to the whole firm values the whole business, owed to lenders and shareholders together. To reach the shares, subtract what the lenders are owed and add back spare cash: equity value = enterprise value - net debt, where net debt is borrowings minus cash. A company with more cash than debt has negative net debt, which adds to the equity.
Then divide by the shares outstanding. If the company has options or convertibles that could create more shares, a diluted share count gives a lower value per share. When net debt is larger than the enterprise value, the equity works out below zero; the calculator shows the figure and says so.
To compare the estimate with a market price, enter the price under Compare with a share price. The calculator reports the percentage gap and nothing more. A gap measures the difference between your assumptions and the market's, and it can close from either side.
Worked examples in pounds, euros and dirhams
- Pounds, year by year, Gordon growth. Free cash flows of £40m, £44m, £47m and £50m, a 10% discount rate and 2% long-term growth. The four years are worth £142.19m today, and the terminal value of 50 x 1.02 / 0.08 = £637.50m is worth £435.42m, for an enterprise value of £577.61m. Less net debt of £60m and divided by 120m shares: £4.31 a share, with 75.4% from the terminal value.
- Euros, start value plus growth, exit multiple. Latest free cash flow €250m, growing 5% a year for six years, so year 6 is €335.02m. At 8%, the six years are worth €1,360.73m; a 10x exit multiple gives a terminal value of €3,350.24m, worth €2,111.22m today. Enterprise value €3,471.95m, less net debt of €900m, divided by 400m shares: €6.43 a share, 60.8% from the terminal value.
- Dirhams, with net cash. Flows of AED 30m, 33m and 36m at 11%, with 3% long-term growth, give an enterprise value of AED 419.04m. Net cash of AED 20m is entered as net debt of -20, so equity is AED 439.04m, or AED 29.27 a share on 15m shares.
The year-by-year rows are plain numbers and stay as typed when you change currency; the other money fields rescale only while they are untouched.
How to do a DCF in Excel or Google Sheets
Put the five free cash flows in B2 to B6, the discount rate in B8 as 0.09 and the long-term growth rate in B9 as 0.025. Excel's NPV function treats every value as arriving at the end of its period, starting one period from now, which is the same timing this calculator uses. So:
- Present value of the five years: =NPV(B8,B2:B6), which returns about 445.85.
- Terminal value at the end of year 5: =B6*(1+B9)/(B8-B9), about 2,081.54.
- Enterprise value: =NPV(B8,B2:B6)+B6*(1+B9)/(B8-B9)/(1+B8)^5, about 1,798.71.
- Value per share: subtract net debt and divide by shares, (1,798.71 - 200) / 50 = 31.97.
To build the sensitivity grid, put the formula in one cell and use a two-way data table, or simply copy the formula with different rates. Keep the rate and growth in separate cells so every scenario uses one formula.
What this DCF leaves out, and common mistakes
- Timing within the year. Every flow is discounted from the end of its year. Some models discount from mid-year, which gives a higher value when the flows are positive; this calculator does not.
- Mismatched rates. Cash flow to the whole firm goes with a whole-firm discount rate, such as the weighted average cost of capital. Cash flow to shareholders goes with a cost of equity and needs no net debt step.
- Nominal and real mixed. If the cash flows include inflation, the discount rate and long-term growth should too.
- A long-term growth rate that outruns the economy forever. Growth in perpetuity compounds without limit, so the rate chosen deserves the most scrutiny.
- Counting cash twice. Interest income on cash inside free cash flow and the same cash inside net debt overlap.
- Tax, dilution and changing debt. The calculator takes net debt and shares as fixed numbers you enter today.
Glossary
Free cash flow (FCF): cash from operations minus the investment needed to sustain and grow the business. Discount rate: the annual return used to turn future cash into today's money. Present value: a future amount divided by (1 + r)^t. Terminal value: the value at the end of the forecast of all later cash flows. Gordon growth: a terminal value from constant growth for ever. Exit multiple: a terminal value from a multiple of a final-year figure. Enterprise value: the value of the whole business. Net debt: borrowings minus cash. Intrinsic value: a value built from the business's own cash flows rather than from the market price.
Frequently asked questions
How do you calculate DCF value per share?
Discount each projected free cash flow and a terminal value back to today, add them to get the enterprise value, subtract net debt and divide by the shares. On the default inputs that is (1,798.71 - 200) / 50 = $31.97 a share.
What is the terminal value in a DCF?
It is the value, at the end of the forecast, of every cash flow after it. With Gordon growth it is the final cash flow x (1 + g) / (r - g); with an exit multiple it is the final-year figure times a multiple.
Why is the terminal value such a large part of the DCF?
It stands in for every year after the forecast, while the forecast covers only a few. On the default inputs it makes up 75.2% of the enterprise value, so the long-term assumption carries most of the answer.
What discount rate should I use in a DCF?
The calculator does not choose it for you. Free cash flow to the whole firm pairs with a whole-firm rate such as the weighted average cost of capital; cash flow to shareholders pairs with a cost of equity. Check the sensitivity table to see how much the choice matters.
Why must the discount rate be higher than the growth rate?
The Gordon growth formula divides by r - g. When g reaches r the denominator is zero, and above it the formula gives a negative value, so neither has a meaning. The calculator asks you to change the rates instead.
What is the difference between enterprise value and equity value?
Enterprise value is what the whole business is worth to lenders and shareholders together. Equity value is what is left for shareholders after net debt is subtracted, or net cash added.
Should I use the Gordon growth or the exit multiple method?
They are two ways of stating the same long-term assumption, and you can check one against the other. On the default flows, 2.5% growth gives $31.97 a share and a 12x exit multiple gives $25.51.
How do I do a DCF in Excel?
Use =NPV(rate, flows) for the forecast years, since Excel's NPV treats each value as arriving at the end of its period. Add the terminal value divided by (1 + rate)^N, subtract net debt and divide by shares.
Is the DCF value the price a share should trade at?
No. It is an estimate built entirely from the cash flows and rates you entered. Different reasonable assumptions give very different values, as the sensitivity table shows.
Does this DCF use the mid-year convention?
No. Every cash flow is discounted from the end of its year. A mid-year convention discounts each flow half a year less, which raises the value of positive cash flows.
Courses behind cash flow valuation
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Last reviewed 14 November 2026 by the NIFM Academy editorial team. Next review by 14 May 2027.
- Microsoft Support, NPV function article, NPV(rate,value1,[value2],...); values must be equally spaced and occur at the end of each period, and the valuation begins one period before value1. Checked 14 November 2026.
- Discounted cash flow and Gordon growth arithmetic, present value = CF / (1 + r)^t; Gordon terminal value = FCF_N x (1 + g) / (r - g); exit multiple terminal value = final-year FCF x multiple; equity = enterprise value - net debt; worked in the tables and the working under every result. Checked 14 November 2026.