A DCF valuation example turns forecast cash flows into an enterprise value, then into equity value and a per-share estimate. Forecast growth, the discount rate, terminal growth, net debt, and diluted share count determine how far the result moves.
Worked DCF Valuation Example
Assume Company A is a hypothetical business used only for illustration. The model uses a five-year firm-value DCF with a 10% discount rate and a 3% terminal growth rate.
| Assumption | Base case |
|---|---|
| Year 1 free cash flow | $100 million |
| Annual free cash flow growth | 8% |
| Explicit forecast period | 5 years |
| Discount rate | 10% |
| Terminal growth rate | 3% |
| Debt | $200 million |
| Cash | $50 million |
| Diluted shares | 100 million |
Forecast Cash Flow and Present Value
| Year | Forecast free cash flow | Present value at 10% |
|---|---|---|
| Year 1 | $100.00 million | $90.91 million |
| Year 2 | $108.00 million | $89.26 million |
| Year 3 | $116.64 million | $87.63 million |
| Year 4 | $125.97 million | $86.04 million |
| Year 5 | $136.05 million | $84.48 million |
The present value of the five explicit forecast years is approximately $438.31 million.
Terminal Value and Enterprise Value
Year 5 free cash flow of $136.05 million becomes approximately $140.13 million in Year 6 under the 3% terminal growth assumption.
| Calculation | Result |
|---|---|
| Year 6 free cash flow | $136.05m × 1.03 = $140.13m |
| Terminal value at the end of Year 5 | $140.13m ÷ (10% – 3%) = $2.002bn |
| Present value of terminal value | $2.002bn ÷ 1.105 = $1.243bn |
| Present value of Years 1-5 | $438.31m |
| Implied enterprise value | $1.681bn |
From Enterprise Value to Per-Share Value
| Bridge item | Amount |
|---|---|
| Enterprise value | $1.681 billion |
| Less debt | $200 million |
| Add cash | $50 million |
| Implied equity value | $1.531 billion |
| Diluted shares | 100 million |
| Implied value per share | $15.31 |
The $15.31 result belongs to this assumption set. A different discount rate or terminal growth rate changes the estimate even when the five-year cash-flow forecast remains unchanged.
DCF Sensitivity: Discount Rate vs Terminal Growth
Holding the five-year cash-flow forecast, net debt, and diluted share count constant isolates how the discount rate and terminal growth assumption affect the per-share result.
| Discount rate | 2.5% terminal growth | 3.0% terminal growth | 3.5% terminal growth |
|---|---|---|---|
| 9% | $16.95 | $18.18 | $19.64 |
| 10% | $14.43 | $15.31 | $16.33 |
| 11% | $12.50 | $13.16 | $13.91 |
The matrix separates two assumptions that can otherwise become mixed inside broad lower, base, and higher scenarios. The spread also shows how much of the valuation conclusion depends on long-term inputs rather than changes in the explicit five-year forecast.
Where the DCF Reading Can Fail
Growth or cash conversion assumptions are stronger than the operating evidence supporting them.
A large share of enterprise value comes from assumptions beyond the explicit forecast period.
Small changes in the required return materially alter the present value of long-duration cash flows.
Debt, cash, other claims, or diluted share count are handled incorrectly when enterprise value is converted to per-share value.
Rebuild the assumption set or widen the valuation range when the conclusion depends on inputs that cannot be supported with enough confidence.
DCF Method References
| Concept | Role in the example | Reference |
|---|---|---|
| Cash generation | Forms the operating cash-flow base used in the forecast. | Free cash flow |
| Present-value adjustment | Controls how future cash flows are translated into today’s value. | Discount rate |
| Post-forecast value | Captures the modeled value beyond the explicit forecast period. | Terminal value |
| Valuation framework | Defines the full method behind the worked example. | Discounted cash flow method |
| Estimated underlying value | Places the model output inside the broader distinction between estimated value and market price. | Intrinsic value |
Limits of the Example
This hypothetical model does not establish future cash flows, business quality, or a future market price. Its value is diagnostic: the forecast, discount rate, terminal assumptions, capital structure, and share count are visible enough to test individually instead of being hidden inside one precise output.