Discounted Cash Flow (DCF) values a company by discounting future free cash flows back to today.

Step 1 — Free Cash Flow (FCF): FCF = EBIT × (1 – Tax Rate) + D&A – CapEx – Change in Working Capital

Example: EBIT $100M, tax 25%, D&A $10M, CapEx $20M, ΔWC $5M FCF = $75M + $10M – $20M – $5M = $60M

Step 2 — WACC (Weighted Average Cost of Capital): WACC = (E/V) × Re + (D/V) × Rd × (1 – T)

Where Re = cost of equity (CAPM: Rf + β × ERP), Rd = cost of debt. Example: 60% equity at 10%, 40% debt at 5% pre-tax (25% tax): WACC = 0.6 × 10% + 0.4 × 5% × 0.75 = 7.5%

Step 3 — Terminal Value (Gordon Growth Model): TV = FCF_n × (1 + g) / (WACC – g)

With FCF year 5 = $80M, g = 2.5%, WACC = 7.5%: TV = $80M × 1.025 / 0.05 = $1,640M

Terminal value typically represents 60–80% of total DCF value — making g and WACC assumptions the most sensitive inputs.

Step 4 — Equity Bridge: Enterprise Value = PV(FCFs) + PV(TV) Equity Value = EV – Net Debt – Minority Interest + Cash Equity Value per share = Equity Value ÷ Diluted Shares Outstanding