Understanding your DCF result
Example: $100,000 in current free cash flow, growing 8% annually for 5 years, a 2.5% terminal growth rate and a 10% discount rate (WACC) produces an enterprise value of approximately $1,720,240 — with the terminal value making up roughly 72% of that total, illustrating how sensitive DCF outputs are to the terminal-value assumptions.
| Terminal value share | What it implies |
|---|---|
| Below ~50% | Most of the estimated value comes from the explicit, more predictable projection period |
| ~50%–75% | A typical range in practice; a substantial share of value rests on long-run growth and discount-rate assumptions |
| Above ~75% | The valuation is highly dependent on the terminal growth and discount rate inputs — small changes to either can swing the result significantly |
- The Gordon growth model is undefined (and this calculator returns no result) when the terminal growth rate is greater than or equal to the discount rate, since the perpetuity formula requires the discount rate to exceed the growth rate.
- This model assumes a constant growth rate throughout the projection period and a single constant terminal growth rate thereafter; real free cash flow rarely grows this smoothly, so results should be treated as one scenario among several, not a precise forecast.
- This calculator estimates enterprise value only; converting enterprise value to equity value requires further adjustments (subtracting net debt, minority interest, and similar items) that this tool does not perform.
What is a discounted cash flow (DCF) valuation?
A DCF valuation estimates what a business is worth today by forecasting its free cash flow for a number of future years, discounting each year's cash flow back to the present using a required rate of return, and adding the present value of everything the business is expected to generate after the explicit forecast ends — the terminal value. It is one of the fundamental intrinsic-valuation approaches described in the CFA Institute equity-valuation curriculum.
The discount rate used is typically the weighted average cost of capital (WACC), which blends the cost of a company's debt and equity financing weighted by how much of each it uses. A higher WACC produces a lower valuation because it discounts future cash flows more heavily, reflecting greater required compensation for risk.
The terminal value represents the largest single assumption in most DCF models because it captures the value of all cash flows beyond the finite projection window, often stretching to infinity under the Gordon growth method. Because of this, the terminal value frequently makes up a large share of total enterprise value, which is why this calculator reports that share explicitly.
How to use this DCF calculator
- Enter the current (Year 0) free cash flow — the cash flow figure the projection will grow from.
- Enter the annual growth rate expected during the explicit projection period.
- Enter the number of years in the projection period (commonly 5 to 10 years in practice).
- Enter the terminal (perpetuity) growth rate — a long-run, sustainable growth rate typically at or below the economy's long-term growth rate, and always less than the discount rate.
- Enter the discount rate (WACC) used to bring both the projected cash flows and the terminal value back to present value.
- Read the enterprise value, the present value contributed by the projection period versus the terminal value, and what share of the total the terminal value represents.
The formula behind this DCF model
Each year's free cash flow is grown at the projection-period growth rate and discounted back to the present at the WACC. At the end of the projection period, the Gordon growth model converts the final year's cash flow, grown one more year at the terminal growth rate, into a single terminal value using the perpetuity growth formula — which requires the discount rate to exceed the terminal growth rate. That terminal value is then itself discounted back to the present and added to the present value of the projected cash flows to produce enterprise value.
Common mistakes
- Setting the terminal growth rate too close to, at, or above the discount rate, which either produces an undefined or an implausibly inflated terminal value.
- Choosing a terminal growth rate that is unrealistically high relative to long-run economic growth, since perpetuity growth compounds forever.
- Overlooking how large a share of total value the terminal value represents, and treating the headline enterprise-value figure as more precise than the underlying long-run assumptions justify.
- Using a discount rate that does not reflect the company's actual capital structure and risk — the WACC should be specific to the business being valued, not a generic figure.
- Confusing enterprise value with equity (per-share) value; this calculator's output is enterprise value, before adjustments for debt and cash.
الأسئلة الشائعة
What is enterprise value in a DCF model?
Enterprise value is the total present value of a business's projected free cash flows plus the present value of its terminal value — an estimate of what the entire operating business is worth, independent of how it is financed. It differs from equity value, which further adjusts for net debt and other claims on the business.
Why is the terminal value often such a large share of DCF enterprise value?
The terminal value captures all cash flows expected beyond the finite projection period, effectively extending to infinity under the Gordon growth model, while the explicit projection period is typically only 5 to 10 years. Because it represents an indefinitely long stream of cash flows, the terminal value frequently accounts for a majority of total estimated enterprise value, which is why analysts scrutinize its assumptions closely.
What happens if the terminal growth rate is set higher than the discount rate?
The Gordon growth perpetuity formula requires the discount rate to exceed the terminal growth rate; if it does not, the formula produces a negative or undefined terminal value, which is not economically meaningful. This calculator returns no result in that case rather than displaying an invalid figure.
What discount rate should be used in a DCF valuation?
Practitioners typically use the weighted average cost of capital (WACC), which blends the cost of debt and the cost of equity in proportion to how the company is actually financed. The WACC should reflect the specific risk of the business being valued, not a rate borrowed from an unrelated company or industry.
How sensitive is a DCF valuation to its assumptions?
Very sensitive, particularly to the terminal growth rate and the discount rate, because both directly shape the terminal value that often dominates total enterprise value. Small changes to either input can produce large swings in the final valuation, which is why DCF outputs are typically presented as a range under different scenarios rather than a single precise number.
المراجع
- CFA Institute. CFA Program Curriculum — Equity Valuation: Discounted Cash Flow and Free Cash Flow Models.
- Damodaran A. Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley (standard DCF and terminal-value reference).
- U.S. Securities and Exchange Commission (SEC), Investor.gov. How to evaluate a company — investor education materials on valuation basics. investor.gov.
- Koller T, Goedhart M, Wessels D (McKinsey & Company). Valuation: Measuring and Managing the Value of Companies. Wiley.