Walk me through a DCF.
Model answer
Project unlevered free cash flow for ~5-10 years. Discount each year back at WACC. Estimate a terminal value at the end (Gordon growth or exit-multiple method) and discount it too. Sum the discounted cash flows plus discounted terminal value to get enterprise value. Subtract net debt to get equity value, then divide by diluted shares for value per share.
⚠ Common wrong answer: "Project net income for five years, discount it back at WACC, and add it up." Why it fails: Two claimant mismatches at once: net income is post-interest (an equity metric) while WACC is a blended all-capital rate — and skipping the terminal value throws away most of the firm's value. You want unlevered FCF plus a discounted TV.
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More from DCF & WACC
- Why do you use unlevered free cash flow in a DCF and how do you calculate it?
- What is WACC and how do you calculate it?
- What are the two ways to calculate terminal value, and how do they differ?
- What discount rate do you use if you're discounting levered free cash flow?
- Two identical companies, one has more debt. Which has the higher WACC?
- A DCF gives a value that seems too high. Which assumptions would you check first?
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