A DCF values a company as the present value of the cash it will generate. With free cash flow, WACC and a terminal value in hand, the rest is assembly:
- Discount each year's FCF: discount factor = 1 / (1 + WACC)^year, and PV = FCF x factor.
=NPV(WACC, FCF row) gives the same total in one step.
- Add the PV of the terminal value to get enterprise value, the value of the whole business.
- Bridge to equity value: subtract debt and add cash (and subtract preferred stock or noncontrolling interests if there are any). Divide by diluted shares for a value per share, and compare it with the share price.
Cash arrives through the year, not all on December 31, so many banks use the mid-year convention: discount year 1 by 0.5 years, year 2 by 1.5, and so on. It raises the value a little.
Finish with a sensitivity table: value per share across a range of WACCs and growth rates, so the answer is presented as a range.
FCF, years 1 to 3 100.0 110.0 120.0 WACC 10.0%
Present value 90.9 90.9 90.2 sum 272.0
Terminal value 1,500.0 at the end of year 3: PV 1,127.0
Enterprise value 1,398.9
Less debt 300.0, plus cash 50.0: equity value 1,148.9
50 diluted shares: value per share $22.98
Enterprise value belongs to lenders and shareholders together; take off net debt to reach what shareholders own.