Calculate enterprise value, equity value and value per share with a DCF: projected free cash flows plus a Gordon-growth terminal value.
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Discounting 5 years of cash flow plus a terminal value gives an enterprise value of $86,012,011.42, 72% of it from the years after the projection. After net debt the equity is worth $76,012,011.42, or $7.60 per share.
| Year | Free cash flow | Discount factor | Present value |
|---|---|---|---|
| 1 | $5,400,000.00 | 0.9091 | $4,909,090.91 |
| 2 | $5,832,000.00 | 0.8264 | $4,819,834.71 |
| 3 | $6,298,560.00 | 0.7513 | $4,732,201.35 |
| 4 | $6,802,444.80 | 0.683 | $4,646,161.33 |
| 5 | $7,346,640.38 | 0.6209 | $4,561,685.67 |
| Terminal | $100,404,085.25 | 0.6209 | $62,343,037.45 |
A discounted cash flow (DCF) valuation prices a business as the present value of the free cash flow it will produce. Here this year's free cash flow grows at a constant rate through the projection years, each year is discounted at the discount rate (usually the WACC), and a terminal value covers every later year with the Gordon growth formula, TV = FCF_N × (1 + g_T) ÷ (r − g_T), discounted back from year N. Subtracting net debt gives equity value, and dividing by shares gives value per share.
With the defaults, 5,000,000 of free cash flow growing 8% a year for 5 years, a 10% discount rate and 2.5% terminal growth, the enterprise value is 86,012,011.42, of which the terminal value supplies 62,343,037.45, or 72%. After 10,000,000 of net debt, the equity is worth 76,012,011.42, or 7.60 a share across 10,000,000 shares.
Because the terminal value usually dominates, small changes in the discount rate or terminal growth move the result a long way. Terminal growth must stay below the discount rate.
Project free cash flow, discount each year by (1 + discount rate)^year, add a discounted terminal value for the years beyond, and subtract net debt. Five years of 5,000,000 growing 8%, discounted at 10% with 2.5% terminal growth, give an enterprise value of 86,012,011.42, or 7.60 a share after debt.
The same company worked by hand, with each cash flow arriving at the end of its year:
Here the terminal value supplies 72% of enterprise value, so the answer rests mostly on two long-run assumptions: the discount rate and terminal growth. At a 9% discount rate the share passes three quarters, at 76%.
A longer explicit forecast moves value out of the terminal figure. Projecting 10 years at the same 8% growth cuts the terminal share to 56% and raises enterprise value to 102,140,925.91, because five more years grow at 8% instead of 2.5%.
These rows keep everything else fixed, including the 10,000,000 of net debt and 10,000,000 shares:
| Discount rate (%) | Enterprise value | Value per share |
|---|---|---|
| 9 | 99615400.68 | 8.96 |
| 10 | 86012011.42 | 7.60 |
| 11 | 75619499.32 | 6.56 |
One point lower adds 15.8% to enterprise value; one point higher takes away 12.1%. Terminal growth matters as well: 2% gives 81,830,466.23 and 3% gives 90,790,920.21, about 5% either side of the 2.5% result.
If projection growth equals terminal growth, the whole stream is one growing perpetuity worth FCF₁ ÷ (discount rate − growth). A cash flow of 100 growing 3% at an 8% rate is worth 103 ÷ 0.05 = 2,060, however many projection years you use.
A flat 100 at 10% is worth 100 ÷ 0.10 = 1,000.
To value a cash-flow series you set year by year, use the NPV and IRR calculator. For the return already earned on an investment, use the ROI and CAGR calculator, and for a fixed-income security, the bond calculator.
Checked against: Summing FCF₀(1.08)^t/1.1^t for t = 1…5 plus the Gordon terminal value discounted 5 years
Checked against: Σ PV = 435.812…, TV = 1627.259, EV = 1446.212
Checked against: A level perpetuity is worth FCF / r = 100 / 0.10 = 1000 (Gordon model with g = 0)
Checked against: When g = g_T the whole stream is a growing perpetuity: FCF₁ / (r − g) = 103 / 0.05 = 2060
Project free cash flow, discount each year at the discount rate, add the discounted terminal value, then subtract net debt. With the defaults, the five projected cash flows are worth 23,668,973.97 today and the terminal value 62,343,037.45, so the enterprise value is 86,012,011.42; less 10,000,000 of net debt, equity is 76,012,011.42.
With the Gordon growth formula: next year's cash flow divided by the discount rate minus the long-run growth rate. The default year-5 cash flow is 5,000,000 × 1.08^5 = 7,346,640.38, so TV = 7,346,640.38 × 1.025 ÷ (0.10 − 0.025) = 100,404,085.25 at the end of year 5, or 62,343,037.45 in today's money.
A rate no higher than the risk-free rate used in the valuation, as Aswath Damodaran of NYU Stern advises, because no business can outgrow the whole economy forever. The choice matters: with the other defaults fixed, terminal growth of 2% gives an enterprise value of 81,830,466.23, 2.5% gives 86,012,011.42 and 3% gives 90,790,920.21.
For free cash flow to the firm, the weighted average cost of capital (WACC), which blends the required return on equity and the after-tax cost of debt. The result is sensitive to it: with the other defaults fixed, a 9% rate values the business at 99,615,400.68, 10% at 86,012,011.42 and 11% at 75,619,499.32.
Enterprise value is what the whole business is worth to all its capital providers; equity value is what is left for shareholders after net debt (debt minus cash). The default enterprise value of 86,012,011.42 minus 10,000,000 of net debt leaves 76,012,011.42 of equity. With net cash, enter net debt as a negative number and equity exceeds enterprise value.
For planning only. Lenders, tax authorities and markets apply their own rounding, fees and rules; confirm figures with them before you commit.
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