Present Value of 5-Yr Cash Flows
₹ 47,85,21,000
Present Value of Terminal Value
₹ 1,42,10,50,000
Total Enterprise Value
₹ 1,89,95,71,000
Intrinsic Value Per Share
₹ 189.96
About the Discounted Cash Flow (DCF) Tool
Our free Discounted Cash Flow (DCF) Tool helps equity investors and financial analysts estimate the intrinsic value of a company or stock. By projecting future Free Cash Flows (FCF) and discounting them back to their present value using an appropriate discount rate (such as WACC), DCF analysis reveals whether a stock is undervalued or overvalued relative to its market price.
1. DCF Valuation Formula
The Discounted Cash Flow model computes enterprise value by summing the present value of explicit forecast-period cash flows and the present value of the terminal value:
Enterprise Value = ∑ [ FCF0 × (1 + g)t / (1 + WACC)t ] + [ Terminal Value / (1 + WACC)5 ]
Where the defined variables are:
- FCF0: Current annual free cash flow baseline of the business.
- g: Expected annual free cash flow growth rate during the 5-year explicit forecast window ($t = 1$ to $5$).
- WACC: Discount rate or Weighted Average Cost of Capital representing required investor return and debt obligations.
- Terminal Value: Estimated enterprise worth beyond year 5, calculated as $\text{FCF}_5 \times (1 + g_{\text{perpetual}}) / (\text{WACC} - g_{\text{perpetual}})$.
2. Practical Worked Example
Let us review a standard equity valuation case study:
- Current Free Cash Flow (FCF0): ₹10,00,00,000 (₹10 Crores)
- Expected Growth Rate (Years 1-5): 12% per annum
- Discount Rate (WACC): 10% per annum
- Perpetual Growth Rate: 4% per annum
- Total Outstanding Shares: 1,00,00,000 (1 Crore shares)
Calculation Breakdown:
- Sum of Present Values of 5-Year Projected Cash Flows $\approx$ ₹47,85,21,000
- Present Value of Terminal Value $\approx$ ₹1,42,10,50,000
- Total Enterprise Value = ₹47,85,21,000 + ₹1,42,10,50,000 = ₹1,89,95,71,000
- Intrinsic Value Per Share = ₹1,89,95,71,000 ÷ 1,00,00,000 shares = ₹189.96 per share
By comparing this computed intrinsic value of ₹189.96 against the current market price, investors can determine if the stock offers a margin of safety!
3. Frequently Asked Questions (FAQs)
1. What is WACC in DCF analysis?
WACC stands for Weighted Average Cost of Capital. It represents the blended average cost a company pays to finance its assets through both debt and equity, serving as the standard discount rate in DCF models.
2. Why is Terminal Value so critical in a DCF model?
Terminal value typically accounts for the majority (often 70% to 80%) of a company's total enterprise value because it captures all projected cash flows extending infinitely beyond the initial 5-year forecast horizon.
3. How do I interpret the intrinsic value per share?
If the calculated intrinsic value per share exceeds the current market trading price, the stock is considered undervalued. If it is lower, the stock may be overvalued relative to its cash-generation capability.
4. What is a "margin of safety" in stock valuation?
Margin of safety is a principle where investors buy a stock at a price significantly below its estimated intrinsic value to protect against potential miscalculations or adverse business headwinds.
5. Can DCF be applied to companies with negative free cash flows?
Applying DCF to early-stage or cash-burning companies is challenging because negative near-term cash flows distort valuations; analysts usually wait until a firm achieves stable, predictable free cash flows.
6. What is the limitation of perpetual growth rates?
The perpetual growth rate should never exceed long-term macroeconomic GDP growth rates (typically capped between 3% to 5%), as assuming infinite growth faster than the broader economy is mathematically unsustainable.
7. Why is DCF considered a superior valuation method by fundamental analysts?
Unlike relative valuation metrics (like P/E ratios) which rely on market sentiment, DCF is grounded in corporate fundamentals, focusing strictly on a business's capacity to generate real cash returns.
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