A DCF is a chain of assumptions
Discounted cash flow valuation estimates what future cash flows are worth today. The arithmetic is mechanical; the judgment sits in the assumptions.
Use a hypothetical company with:
- current annual free cash flow: ₹100 crore,
- forecast period: 5 years,
- FCF growth: 10% a year,
- discount rate / WACC: 12%,
- terminal growth: 4%,
- debt before separately modelled cash: ₹200 crore,
- cash added separately: ₹50 crore,
- shares outstanding: 10 crore.
Step 1: Forecast free cash flow
Starting from ₹100 crore, 10% growth gives approximately:
| Year | Forecast FCF |
|---|---|
| 1 | ₹110.0 crore |
| 2 | ₹121.0 crore |
| 3 | ₹133.1 crore |
| 4 | ₹146.4 crore |
| 5 | ₹161.1 crore |
These are not expected returns on the share price. They are operating cash-flow assumptions used inside the valuation model.
Step 2: Discount each forecast
Cash received years from now is worth less today. Each year’s FCF is therefore divided by (1 + WACC)^year.
At 12%, the ₹161.1 crore year-five cash flow has a present value well below ₹161.1 crore. Adding the present value of all five forecast years gives an explicit-period value of approximately ₹473.8 crore.
Step 3: Estimate terminal value
The model still needs to value cash flows after year five. A perpetual-growth approach uses:
Terminal value = Year-6 FCF ÷ (WACC − terminal growth)
With a 4% terminal-growth assumption, year-six FCF is year-five FCF multiplied by 1.04.
The denominator is only 8 percentage points in this example: 12% − 4%. That produces a terminal value of approximately ₹2,093.7 crore. That explains why terminal value can become such a large part of the total DCF.
Step 4: Discount terminal value back to today
Terminal value sits at the end of the explicit forecast period, so it must also be discounted. Enterprise value is then:
PV of forecast FCF + PV of terminal value
Discounting the ₹2,093.7 crore terminal value back five years gives approximately ₹1,188.0 crore. Added to the ₹473.8 crore explicit-period value, enterprise value is approximately ₹1,661.8 crore. The discounted terminal value is about 71.5% of enterprise value, which is exactly why the terminal assumptions deserve scrutiny.
Step 5: Move from enterprise value to equity value
The operating business belongs to both debt and equity capital providers. A simplified bridge is:
Equity value = enterprise value − debt + separately modelled cash
This is the convention used by the Finpockett calculator: the ₹200 crore input is debt before the separate ₹50 crore cash input, not debt that is already net of cash. Using that convention gives equity value of approximately ₹1,511.8 crore, or about ₹151.2 per share across 10 crore shares. If you instead enter a net-debt figure that already deducts cash, set the calculator's separate cash input to ₹0 so cash is not counted twice.
What a responsible DCF output should show
A single per-share number is not enough. You should also see:
- PV of forecast cash flows,
- PV of terminal value,
- enterprise value,
- equity value,
- sensitivity to WACC,
- sensitivity to terminal growth.
If terminal value is most of the enterprise value, the model is especially sensitive to assumptions far beyond the forecast period.
Frequently asked questions
Is the DCF output a target price?
No. It is the result of a valuation model under selected assumptions, not a recommendation or forecast.
Can terminal growth exceed WACC?
No in the perpetual-growth formula used here. The denominator would become zero or negative and the result would not be economically meaningful.
Should I use profit instead of free cash flow?
Not interchangeably. DCF should use a cash-flow measure consistent with the discount rate and valuation bridge.
Why does debt reduce equity value?
Enterprise value represents the operating business before financing claims. In this calculator, subtract the debt input and then add any cash entered separately. If your input is already net debt, set separate cash to ₹0.