DCF Valuation: A Worked Example for Finance Beginners

CFA Institute distinguishes FCFF, which is available to the company's capital providers, from free cash flow to equity (FCFE), which is available to common shareholders. That distinction determines the discount rate and valuation bridge. This exercise uses FCFF and WACC. It does not discount an accounting profit figure or mix an FCFE forecast with WACC. A full model would connect the forecast to revenue, margins, tax, reinvestment and working capital, then reconcile the inputs to source statements.

1. Fix the valuation date and forecast three annual FCFF figures in the same currency units.
2. Discount each year-end cash flow by (1 + WACC) raised to its year number.
3. Estimate the value of cash flows after year three using an explicit terminal assumption, then discount it to today.
4. Add the discounted parts to estimate enterprise value; bridge to equity value using the applicable debt, cash and other claims.
5. Divide by the relevant share count and test how sensitive the result is to assumptions.

Imagine a fictional company with forecast FCFF of INR 100 lakh in year one, INR 110 lakh in year two and INR 121 lakh in year three. Assume all cash flows arrive at each year-end, WACC is 10%, long-run growth after year three is 3%, debt is INR 300 lakh, excess cash is INR 50 lakh and there are 10 lakh shares. These are teaching inputs, not market estimates. For this simplified example, assume no minority interests, preferred securities or other non-operating adjustments.

The three forecast years contribute about INR 272.73 lakh in present value. Year-four FCFF for the terminal calculation is 121 × 1.03 = INR 124.63 lakh. Under this constant-growth illustration, terminal value at the end of year three is 124.63 / (0.10 − 0.03) = INR 1,780.43 lakh. Discounting that amount for three years gives about INR 1,337.66 lakh today. WACC must exceed the assumed perpetual growth rate for this particular formula to work.

For international readers, lakh means 100,000. The model uses INR lakh for cash flows and company values, and lakh shares for the share count. Dividing equity value in INR lakh by shares in lakh produces INR per share; the scale factors cancel. Currency amounts must remain consistent. Changing the currency label alone does not convert a valuation or make an invented discount rate suitable for a different market.

Add INR 272.73 lakh and INR 1,337.66 lakh to get an illustrative enterprise value of INR 1,610.39 lakh. In this deliberately simple bridge, subtract INR 300 lakh debt and add INR 50 lakh excess cash: equity value is INR 1,360.39 lakh. Divide by 10 lakh shares to obtain approximately INR 136.04 per share. Rounding intermediate lines may change the last few paise. Real analysis must verify the definition and date of every balance-sheet item and the appropriate diluted share count.

Keeping the same FCFF and 3% terminal growth but raising WACC from 10% to 11% changes the illustrative value per share from about INR 136.04 to INR 115.69. At 12% WACC, it falls to about INR 99.88. These are mechanical scenarios, not suggested discount rates. Roughly 83% of the 10% case's enterprise value comes from the discounted terminal value, so a reader should challenge the long-run growth and discount assumptions before treating the output as precise.

• Check whether the forecast cash flows can be reconciled to operating assumptions and source statements.
• Show WACC and long-run growth separately; never hide them inside a hard-coded valuation cell.
• Keep enterprise-value items and equity-value items distinct, with consistent dates and currency units.
• Recalculate a range of assumptions and explain why the conclusion may change.

Preview the DCF calculation trail, units and sensitivity checks

Check units, source dates and periods before modelling

Verify AI-generated spreadsheet formulas before using them

Use a fictional input sheet, a calculation sheet and a review note. State each assumption and formula, show the enterprise-to-equity bridge, and explain the large terminal-value share and missing evidence. Describe it as a classroom or self-directed exercise. A three-year model does not demonstrate an employer's full investment-banking, valuation or research process, and it does not establish a fair price for a real share.

Read CFA Institute's free-cash-flow valuation framework

Compare DCF with a worked capital-budgeting NPV

Explore the financial modelling and valuation module

This is educational modelling with fictional data. It is not personal investment advice, a price target, or evidence of a particular employment outcome.