DCF and WACC
BOTH · Valuation / DCF
Forecast free cash flow, terminal value, discount rates, sensitivities, and the DDM for banks.
Forecasts, WACC, and terminal value
The idea
A discounted cash flow values a business as the present value of the cash it will generate for all capital providers. It is an intrinsic method: it depends on your forecast and discount rate, not on what peers trade at.
How to answer in an interview
"Project unlevered free cash flow for five to ten years, discount it at WACC, add the present value of a terminal value from either Gordon growth or an exit multiple, and that is enterprise value. Subtract net debt and other claims to get equity value and divide by diluted shares."
Drawing diagram…
Forecast revenue down to EBIT, tax it to NOPAT, then add back D&A and subtract capex and the increase in net working capital to get unlevered free cash flow. Discount each year's UFCF and a terminal value (Gordon growth or exit multiple) at WACC and sum them to enterprise value. Bridge to equity value by subtracting net debt, preferred stock and non-controlling interest and adding non-operating assets, then divide by diluted shares for an implied share price.
Common pitfall
WACC is an opportunity cost, not a negotiating position. Unlever the beta, then relever for the target structure — mixing levered and unlevered figures is the classic slip.
Learn these first
Study module
- DCF and WACC60 min