Breakdown
How it works
Project free cash flow at two growth rates, discount each year at the WACC, add a terminal value for cash flows beyond year 10 (FCF × (1 + g) ÷ (WACC − g)), then subtract net debt to move from enterprise to equity value. When terminal value is more than ~70% of EV, the valuation is a bet on the perpetuity assumptions.
Formula
Worked example
1m FCF growing 12% then 6%, 2.5% terminal, 10% WACC, 2m net debt, 1m shares: EV ≈ 22.6m, equity ≈ 20.6m, ≈ 20.60 per share, terminal value 55% of EV.
Frequently asked questions
What WACC should I use?
Use the WACC calculator: typically 8–10% for stable GCC or UK corporates, 10–14% for small or emerging-market companies, 15%+ for start-ups.
Levered or unlevered free cash flow?
Unlevered (before interest) with WACC gives enterprise value; levered FCF with cost of equity gives equity value directly. Do not mix.
How do I sanity-check a DCF?
Compare the implied EV/EBITDA and P/E to listed peers, and check that terminal growth is at or below long-run nominal GDP growth.