Business valuation (DCF): How we calculate
Value a business from entered free cash flows to the firm (FCFF).
How we calculate
Discounted cash flow (DCF) converts future cash flows into value today. Free cash flow to the firm (FCFF) scenario: three annual cash flows and terminal value are discounted at the entered rate. Net debt is deducted for equity value. Terminal growth must be below the rate; free cash flow to equity (FCFE) needs a separate model. FCFF is cash flow available to the business after operating costs, operating taxes and investments, before financing payments. Terminal value at the end of year three = FCFF₃ × (1 + g) / (r − g): thereafter the model assumes perpetual constant growth at g. Cash flows occur at year-end and the discount rate must match the FCFF assumptions. In the formula, r and g are decimal fractions: 10% = 0.10 and 2% = 0.02.
What the figures mean
- Business valuation from future cash flows (DCF)
Future cash flows are valued today. This model separately includes cash flows after the forecast and adjusts for debt when estimating owners’ equity value.
Simple example: A €1,000 flow in one year at 10% is worth about €909.09 today. This values one flow, not the whole business.
- Free cash flow for the whole business (FCFF)
Operating cash after tax, required investment and working-capital changes, before distribution to lenders and owners. It is not just the cash left for shareholders.
Simple example: €1,000 of after-tax operating cash less €300 required investment leaves €700 if working capital is unchanged.
- Valuing future money today
A future amount is reduced using the chosen required return to compare it with money today. This is discounting, not a shop discount or solely an inflation adjustment.
Simple example: €110 in one year at a 10% rate corresponds to €100 today.
- Value of cash flows after the forecast
An estimate of money the business generates after the last explicitly forecast year. It is separately valued today and is not necessarily a sale price.
Simple example: After five detailed forecast years, later cash flows are estimated without counting year five again.
- Owners’ equity
In company accounts, assets less liabilities. In a property investment, your initial equity is your own money; the estimated value of your stake can differ from that amount.
Simple example: Company assets of €100,000 less €60,000 liabilities leave €40,000 of book equity.
Worked example
These illustrative inputs let you check the method. They are not figures for a real company or automatically current tax rates.
Inputs
- Year 1 cash flow
- 100,000
- Year 2 cash flow
- 110,000
- Year 3 cash flow
- 120,000
- Discount rate (%)
- 10
- Growth after forecast (%)
- 2
- Net debt
- 200,000
- Number of shares or units
- 10,000
Results
- Enterprise value
- 1,421,487.6033
- Equity value
- 1,221,487.6033
- Value per share
- 122.1488
- Terminal present value
- 1,149,511.6454
- Terminal share of enterprise value (%)
- 80.8668
Change assumptions in the calculator and compare outcomes. Money follows your input unit; figures from different periods need adjustment before comparison.
The estimate is highly sensitive to the discount rate and terminal growth. Compare scenarios; this is not a market quote.