Who asked: the head of research at an equity research team. Cairnmore Outfitters, a listed outdoor retailer (made up for practice, as are all its figures), has just announced a store expansion, and the shares trade at $32.00. She wants your view.
The data: 2025 revenue, five years of assumptions (growth, margins, capex for the new stores, working capital), the inputs for the cost of capital, net debt, shares, options and the share price, all on the DCF sheet.
What done looks like: an annual DCF from revenue to value per share; WACC from CAPM; terminal value by perpetuity growth with an exit multiple cross-check; diluted shares by the treasury stock method; a WACC and growth sensitivity grid; and a Buy, Hold or Sell call. This is practice, not investment advice.
This project builds a complete DCF, the valuation most equity research and banking teams start from, in twelve steps on one sheet. Your work carries over from step to step:
- revenue; 2. EBITDA, D&A and EBIT; 3. taxes and NOPAT, with no tax on a loss; 4. capex and working capital; 5. unlevered free cash flow; 6. WACC; 7. discounting; 8. terminal value and enterprise value; 9. an exit multiple cross-check; 10. value per share on diluted shares; 11. a sensitivity grid; 12. the recommendation.
Cairnmore is spending heavily on new stores, so its free cash flow is negative for the first two years. That's common for a growing company, and the DCF handles it: negative years reduce the value, and the terminal value carries more of it.
The model is annual with no stub period: cash flows arrive at the end of each year. Every step is checked on different inputs too, so point each formula at the assumptions.