FairValueToolkit
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DCFAswath Damodaran / McKinsey & Co.

2-Stage DCF (Discounted Cash Flow) Calculator

DCF values a company by projecting Free Cash Flow to Firm (FCFF), discounting it by the Weighted Average Cost of Capital (WACC), and adjusting for net debt to determine fair equity value per share.

Calculator Inputs
Cash Flow Statement (CFO - CapEx)
Balance Sheet (Total Debt minus Cash & Cash Equivalents)

Theoretical Foundation & Equation

A 2-stage FCFF DCF model splits enterprise valuation into an explicit high-growth forecast period (years 1 to n) and a perpetual stable growth Terminal Value period discounted back to present value.

Core Intrinsic Formula
Enterprise Value (EV) = Sum of Discounted Explicit FCFF + [Terminal FCFF × (1 + gT) / (WACC - gT)] / (1 + WACC)^n
Variable Definitions & Disclosure Guidance
SymbolVariable NameDescriptionFiling Source Guide
FCFF_tFree Cash Flow to FirmOperating Cash Flow minus Capital Expenditures (CapEx) and working capital changesCash Flow Statement: CFO minus CapEx
WACCWeighted Average Cost of CapitalBlended cost of equity and after-tax cost of debt weighted by target capital structureCalculated via CAPM + credit spread, typically 7-10%
g_TPerpetual Growth RateLong-term sustainable growth rate capped at the long-term GDP growth rate (1.5-2.5%)Conservative economic growth expectations
Net DebtNet DebtTotal interest-bearing debt minus excess cash & marketable securitiesBalance Sheet: Total Debt - Cash & Cash Equivalents
Financial Intuition: An enterprise is valued as an asset-generating cash machine. After satisfying debt holders by deducting net debt and minority interests from enterprise value, all remaining equity value belongs to common stockholders.

Step-by-Step Worked Example

Beta Dynamics Inc. (Damodaran Benchmark Case)

FCFF projected at $10M, $11M, $12M for years 1-3, terminal growth 3.0%, WACC 9.0%, Net Debt $30M, 10M diluted shares.

Sample Financial Filing Inputs
Year 1-3 FCFF
$10M, $11M, $12M
Financial Forecast Model
WACC / Terminal Growth
9.0% / 3.0%
Capital Cost Analysis
Net Debt
$30M (Debt $50M - Cash $20M)
Balance Sheet Net Debt
Diluted Shares
10M Shares
Common Share Count
Calculation Steps
Step 1: Present Value of 3-Year Explicit FCFF$27.70M
10/(1.09) + 11/(1.09)^2 + 12/(1.09)^3 = $9.17M + $9.26M + $9.27M = $27.70M
Step 2: Terminal Value & Present Value$159.07M (85.2% of EV)
TV3 = 12 × 1.03 / (0.09 - 0.03) = $206.0M | PV(TV) = $206.0M / (1.09)^3 = $159.07M
Step 3: Enterprise Value to Equity Value$15.68 per share
EV = $27.70M + $159.07M = $186.77M | Equity = $186.77M - $30M = $156.77M
Example Conclusion & Interpretation

Enterprise value of $186.77M less $30M net debt leaves $156.77M equity value, yielding a fair value of $15.68 per share.

Suitability Checklist & Limitations

Best Suited For
  • •Non-financial corporations with predictable operating cash flows and rational CapEx
  • •Mature industrial, healthcare, tech infrastructure, and consumer companies
  • •Acquisition and buyout analysis where full enterprise cash flow is evaluated
Not Suitable For
  • •Commercial banks, insurance companies, and financial institutions (debt is an operational asset)
  • •Early-stage pre-revenue startups with deeply negative cash flows and no visibility
Recommended Alternative Model

For financial institutions, the Dividend Discount Model (DDM) or S-RIM is standard practice.

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Frequently Asked Questions

If WACC <= gT, the denominator (WACC - gT) becomes zero or negative, causing mathematical divergence. No real-world company can perpetually outgrow its cost of capital.
Primary Citations & Source Documentation
Aswath Damodaran (NYU Stern) (2012)

Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (3rd Ed.)

View Source / Filing Reference
Legal Caveat
  • DCF is highly sensitive to terminal growth and WACC parameters; always check the 3-tier sensitivity bands.
  • For educational reference only; not investment advice.