DCF Valuation — Discounted Cash Flow Valuation Methodology
A specialized skill that enhances the DCF analysis capabilities of the valuation-expert agent.
Target Agent
- valuation-expert — DCF model construction, WACC calculation, terminal value computation
DCF Model Construction Process
Step 1: FCFF (Free Cash Flow to Firm) Estimation
FCFF = EBIT x (1 - Tax Rate)
+ Depreciation & Amortization
- Capital Expenditures (CAPEX)
- Change in Net Working Capital (dNWC)
| Item |
Estimation Method |
Key Considerations |
| EBIT |
Revenue x Operating Margin estimate |
Use normalized EBIT |
| Tax Rate |
Effective or statutory rate |
Consider deferred tax |
| D&A |
Tangible Assets x Depreciation Rate |
Verify balance with CAPEX |
| CAPEX |
Maintenance CAPEX + Growth CAPEX |
Validate ratio vs. D&A |
| dNWC |
NWC as % of Revenue |
Cash outflow with revenue growth |
Step 2: WACC (Weighted Average Cost of Capital) Calculation
WACC = E/(E+D) x Ke + D/(E+D) x Kd x (1-T)
| Variable |
Calculation Method |
Reference Values |
| Ke (Cost of Equity) |
CAPM = Rf + B x MRP + SP |
10-15% |
| Rf (Risk-Free Rate) |
10-year government bond yield |
3-4% |
| MRP (Market Risk Premium) |
Equity Risk Premium |
5-7% |
| B (Beta) |
Peer Unlevered B average → Re-lever |
0.8-1.5 |
| SP (Size Premium) |
Market cap based |
Startups 3-5% |
| Kd (Cost of Debt) |
Weighted average borrowing rate |
4-6% |
| T (Tax Rate) |
Effective tax rate |
20-25% |
CAPM Beta Calculation Process
1. Select 5+ comparable companies
2. Collect each company's Levered Beta
3. Calculate Unlevered Beta: BU = BL / [1 + (1-T) x D/E]
4. Calculate average Unlevered Beta of comparables
5. Re-lever for target company's capital structure: BL = BU x [1 + (1-T) x D/E]
Step 3: Terminal Value
Method 1: Perpetuity Growth Model (Gordon Growth)
TV = FCFFn+1 / (WACC - g)
= FCFFn x (1+g) / (WACC - g)
| Variable |
Standard |
Caution |
| g (Perpetual Growth Rate) |
At or below GDP growth (1.5-3%) |
Model invalid if g > WACC |
| FCFFn |
Last forecast year FCF |
Must be at normalized level |
Method 2: Exit Multiple
TV = EBITDAn x Exit Multiple
| Industry |
Typical EV/EBITDA Range |
| SaaS |
15-30x |
| Manufacturing |
6-10x |
| Retail |
8-12x |
| Financial Services |
8-12x |
| Biotech |
20-40x (pipeline value) |
Step 4: Enterprise Value Calculation
Enterprise Value = Sum(FCFFt / (1+WACC)^t) + TV / (1+WACC)^n
Equity Value = EV - Net Debt - Preferred Stock - Minority Interest
Per-Share Value = Equity Value / Shares Outstanding
DCF Quality Validation Checklist
- Is terminal value within 60-75% of total value? (Warning if exceeded)
- Is perpetual growth rate at or below GDP growth?
- Is the beta used in WACC calculation reasonable?
- Is FCF projection consistent with historical trends?
- Is D&A approximately equal to maintenance CAPEX? (for mature companies)
- Does revenue growth rate gradually converge?
- Does operating margin converge to industry average?
Startup/High-Growth Company DCF Adjustments
| Issue |
Solution |
| Negative cash flows |
Explicitly state breakeven timing, model cash burn until then |
| High growth rates |
2-stage model (high growth period + stable growth period) |
| Beta not estimable |
Use comparable public company beta, or directly apply VC discount rate (25-35%) |
| Insufficient market data |
Parallel VC Method, Berkus Method |
Multiples Valuation (Cross-check)
| Multiple |
Applicable To |
Calculation |
| EV/Revenue (PSR) |
Early SaaS, high growth |
EV / Annual Revenue (NTM) |
| EV/EBITDA |
Profitable companies |
EV / EBITDA (NTM) |
| P/E |
Public companies |
Stock Price / EPS |
| EV/ARR |
SaaS |
EV / ARR |
Always cross-validate DCF results with multiples valuation.
