1. What Is Discounted Cash Flow Valuation?

Discounted Cash Flow (DCF) valuation is a financial analysis method used to estimate the value of an investment based on its expected future cash flows. The DCF model calculates the present value of expected future cash flows using a discount rate, which reflects the riskiness of those cash flows.

2. How Does The Calculator Work?

The calculator uses the perpetuity growth DCF formula:

Where:

• \( FCFF \) — Free Cash Flow to Firm (currency)
• \( WACC \) — Weighted Average Cost of Capital (%)
• \( g \) — Perpetual growth rate (%)

Explanation: This formula assumes the company will grow at a constant rate forever (perpetuity growth model). The denominator (WACC - g) represents the discount rate minus the growth rate, which discounts future cash flows to their present value.

3. Importance Of DCF Valuation

Details: DCF valuation is widely used in corporate finance, investment banking, and equity research. It provides a fundamental, intrinsic value estimate that is independent of market sentiment and comparable company analysis.

4. Using The Calculator

Tips: Enter FCFF in currency units, WACC and growth rate as percentages. Ensure WACC is greater than the growth rate for valid results. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is FCFF and how is it different from FCFE?
A: FCFF (Free Cash Flow to Firm) represents cash available to all investors (debt and equity), while FCFE (Free Cash Flow to Equity) represents cash available only to equity investors after debt obligations.

Q2: How do I determine the appropriate WACC?
A: WACC should reflect the company's capital structure and the riskiness of its operations. It's typically calculated as the weighted average of cost of equity and after-tax cost of debt.

Q3: What is a reasonable perpetual growth rate?
A: The perpetual growth rate should not exceed the long-term GDP growth rate of the economy (typically 2-3% for developed markets). It should always be less than WACC.

Q4: When is the perpetuity growth model appropriate?
A: This model is best for mature, stable companies with predictable growth patterns. For high-growth companies, multi-stage DCF models are more appropriate.

Q5: What are the main limitations of DCF valuation?
A: DCF is sensitive to input assumptions, particularly growth rates and discount rates. Small changes in these inputs can significantly impact the valuation result.