What discount rate should I use in a DCF?

Use the weighted average cost of capital when you discount free cash flow to the firm, because that cash belongs to lenders and shareholders together. Build it from a CAPM cost of equity, an after-tax cost of debt, and market-value weights for each. For a large listed company in a developed market, WACCs commonly land in the high single digits to low teens, but the right figure depends on your own beta, capital structure and the risk-free rate on the valuation date. If you are discounting cash flow to equity instead, use the cost of equity alone.

Why does my terminal value account for most of the enterprise value?

Because five or ten years of cash flow is a small fraction of a going concern's life. Terminal value routinely represents 65–80% of enterprise value in a five-year model, and that is normal rather than a defect. It becomes a problem above roughly 85%, where the explicit forecast barely matters and the valuation is effectively a multiple applied to a distant year. The fix is to extend the forecast until the business genuinely reaches a steady state, and to cross-check the implied exit multiple against comparables.

What happens if the terminal growth rate is higher than the WACC?

The perpetuity formula breaks and this calculator returns no answer. The denominator WACC − g goes to zero or negative, which mathematically means a stream growing faster than it is discounted has infinite present value. Economically it means the business eventually becomes larger than the economy, which cannot happen. Cap terminal growth at something like long-run expected inflation plus real GDP growth, or switch to the exit multiple method.

Should I use the mid-year convention?

Use it when cash flow arrives evenly through the year, which is true of most operating businesses. It discounts each flow by half a year less and raises every present value by the square root of one plus the WACC — 4.6% at a 9.5% WACC. Year-end discounting is the more conservative convention and is common in credit work. Neither is more correct in principle; what matters is that you apply the same convention to the forecast flows and the terminal value, and that you disclose it.

How do I get from enterprise value to a share price?

Subtract net debt from enterprise value to get equity value, then divide by fully diluted shares. Net debt is total borrowings plus preferred stock and minority interest, less cash and marketable securities. Add any non-operating assets not reflected in the cash flow forecast, such as equity stakes or surplus real estate. Use a diluted share count that includes in-the-money options and convertible dilution, calculated by the treasury stock method as at your valuation date.

Can I use this if free cash flow is negative today?

You can, but read the output carefully. With a negative base cash flow and a constant growth rate, every forecast year stays negative and the forecast period contributes negative present value, so the entire valuation rests on the terminal assumption. That is a poor use of a DCF. For a pre-profit business, model the path to profitability year by year in a spreadsheet, or use a scenario-weighted venture approach where each outcome is valued and probability-weighted separately.

What is the difference between an unlevered and a levered DCF?

An unlevered DCF discounts free cash flow to the firm at the WACC and produces enterprise value; a levered DCF discounts free cash flow to equity at the cost of equity and produces equity value directly. The unlevered form is standard because it separates operating performance from financing policy and is easier to compare across companies. The levered form is used for financial institutions, where debt is part of operations and enterprise value has no clear meaning.

How many forecast years should I model?

Model until the business reaches a steady state, which for most mature companies is five years and for a high-growth company can be ten or more. The test is not the calendar but the economics: at the terminal year, growth, margins, capital expenditure relative to depreciation and working capital intensity should all be at levels you are willing to assume forever. If year five still shows 20% growth, capitalising it into perpetuity will overstate the value badly.

Why does my DCF value differ so much from the market price?

Almost always because of the discount rate and the terminal assumption rather than the forecast. A single point of WACC changes the terminal multiple by about a tenth at a wide spread and by a quarter or more at a narrow one — read across any row of the reference table on this page — and the terminal value is usually most of the answer. Before concluding the market is wrong, solve the model backwards: hold the price fixed and see what growth rate and WACC combination the market is implying. That implied set of assumptions is usually more informative than your own point estimate.

DCF Enterprise Value Calculator: FCFF, WACC & Terminal Value

Inputs this calculator takes, with typical values
Input	What to enter	Example
Base free cash flow to the firm	Last twelve months' unlevered free cash flow. Enter every dollar figure on this page in the same unit, e.g. millions.	100 $M
FCFF growth rate during the forecast	Compound annual growth applied to the base cash flow across the explicit forecast years.	6 %
Explicit forecast period	How many years you forecast in detail before the business reaches a steady state.	5 years
WACC (discount rate)	The blended after-tax cost of capital for the whole firm, since FCFF belongs to debt and equity together.	9.5 %
Terminal value method	Perpetuity growth is the academic default; an exit multiple anchors the terminal year to trading comparables.	Perpetuity growth (Gordon)
Perpetuity growth rate	Growth of free cash flow forever after the forecast ends. It must stay below the WACC or the formula has no finite answer.	2.5 %
Exit multiple on final-year FCFF	Enterprise value divided by final-year free cash flow — an EV/FCF multiple, not the EV/EBITDA figure peer screens usually quote.	14 ×
Net debt	Total debt plus preferred and minority interest, minus cash and marketable securities. Negative means net cash.	250 $M
Diluted shares outstanding	Fully diluted share count in the same scale as your dollar figures, so millions of dollars over millions of shares gives dollars per share.	120 M
Use the mid-year convention	Tick this if cash arrives evenly through the year rather than all on the last day; it discounts each flow half a year less.	No

What a discounted cash flow model actually values

A DCF values a business as the money it will hand its owners, discounted for the fact that money arriving later is worth less than money arriving now. Nothing else in it is fundamental. Every other line — revenue build, margin ramp, working capital schedule — exists only to produce the cash flow line and the discount rate.

This calculator runs the unlevered version, which is the one used in almost all banking and equity research work. You forecast free cash flow to the firm: the cash the operating business throws off before any payment to lenders or shareholders. Because that cash belongs to debt and equity together, you discount it at the weighted average cost of capital, and the answer is enterprise value — the value of the operations, independent of how they happen to be financed. You then subtract net debt to arrive at what the equity is worth, and divide by diluted shares to get a price per share you can compare with the screen.

The alternative, a levered DCF, forecasts free cash flow to equity and discounts at the cost of equity to reach equity value directly. It gives the same answer in theory and rarely does in practice, because the capital structure has to be modelled year by year. Use the unlevered form unless you are valuing a bank or an insurer, where debt is raw material rather than financing and enterprise value has no meaning.

Build the cash flow line first with the FCFF calculator, then bring the result here.

The formula, term by term

Enterprise value is a sum of two present values. The first is the explicit forecast: each year's cash flow divided by one plus the discount rate raised to the number of years you wait for it. The second is the terminal value: everything after the forecast ends, valued as at the final forecast date and then discounted back the same way.

The discount factor 1 ÷ (1 + WACC)^t is the price of patience. At a 9.5% WACC, a dollar five years out is worth 63.5 cents today, and a dollar ten years out is worth 40.3 cents. That decay is why the explicit forecast rarely carries most of the value and why arguing about year-four gross margin is usually less productive than arguing about the terminal assumptions.

The terminal value compresses an infinite stream into one number. The perpetuity growth form, TV = FCFF_n(1 + g) ÷ (WACC − g), is the Gordon growth formula applied to a whole firm rather than a dividend; the same algebra is set out in the terminal value calculator. The numerator is the first post-forecast year's cash flow. The denominator is the spread between what investors demand and what the business can grow at forever. That spread is small — seven points in the default case — so terminal value is extremely sensitive to both inputs, and a half-point change in either moves the answer by several percent.

The exit multiple form replaces that judgement with a market observation: what would a buyer pay for this cash flow stream at the exit date? It has the advantage of being checkable against comparable companies and the disadvantage of importing today's market mood into a valuation meant to be independent of it. Watch the denominator: this calculator applies the multiple to final-year free cash flow, whereas bankers normally quote EV/EBITDA. The two are linked by FCFF = EBITDA − tax on EBIT − CapEx − ΔNWC, so for any tax-paying business whose investment outweighs a working-capital release, terminal-year FCFF is the smaller figure and the EV/FCF multiple is therefore the larger one. Pasting a peer EV/EBITDA number straight into this field understates the terminal value. If you want to work in EBITDA terms, use the terminal value calculator, which takes terminal-year EBITDA directly. Serious models run both methods and reconcile.

The mid-year convention discounts each flow by half a year less, on the reasoning that cash arrives through the year rather than in a single December payment. It raises every present value by a factor of √(1 + WACC) — 4.6% at a 9.5% WACC. It is a convention, not a correction; state which one you used.

Worked example: $100M of FCFF growing 6% for five years at a 9.5% WACC

Take a company generating $100M of unlevered free cash flow, expected to grow 6% a year for five years, then 2.5% forever. Its WACC is 9.5%, it carries $250M of net debt, and it has 120 million diluted shares. Year-end discounting.

Project the cash flows. Multiply by 1.06 each year: $106.00M, $112.36M, $119.10M, $126.25M, $133.82M.
Build the discount factors. 1.095 = 1.0950, then 1.1990, 1.3129, 1.4377, 1.5742. The reciprocals are the factors.
Discount each year. 106.00 ÷ 1.0950 = $96.80M; 112.36 ÷ 1.1990 = $93.71M; 119.10 ÷ 1.3129 = $90.71M; 126.25 ÷ 1.4377 = $87.81M; 133.82 ÷ 1.5742 = $85.01M.
Sum the forecast period. 96.80 + 93.71 + 90.71 + 87.81 + 85.01 = $454.05M.
Grow the final year once more. $133.82M × 1.025 = $137.17M — the first perpetuity year.
Capitalise it. $137.17M ÷ (0.095 − 0.025) = $137.17M ÷ 0.07 = $1,959.54M, the terminal value standing at the end of year five.
Discount the terminal value. $1,959.54M ÷ 1.5742 = $1,244.76M.
Add them. Enterprise value = 454.05 + 1,244.76 = $1,698.81M.
Bridge to equity. 1,698.81 − 250 = $1,448.81M; divided by 120 million shares = $12.07 per share.

Two diagnostics fall out of this. The terminal value is 1,244.76 ÷ 1,698.81 = 73.3% of enterprise value. And the terminal value implies a multiple of 1,959.54 ÷ 133.82 = 14.6× final-year free cash flow — a number you can hold up against what comparable businesses actually trade for.

How to read the result

Compare the value per share with the market price, but treat a gap as a hypothesis rather than a signal. A DCF that lands within roughly 10% of the traded price is telling you your assumptions match consensus. A DCF that comes out at double the price is almost always telling you something about your inputs, not about the market.

Check the terminal share first. A five-year model with a normal WACC typically puts 65–80% of enterprise value in the terminal period, purely because five years of cash flow is a small slice of a going concern's life. Above 85%, the explicit forecast is decoration; either extend the horizon until the business genuinely reaches steady state, or accept that you are really applying a multiple and say so.

Then check the implied exit multiple. This is the discipline that separates a model from a fantasy. If your perpetuity assumptions imply 25× terminal free cash flow and the peer group trades at 12×, the terminal growth rate is doing work the business cannot do. Run it the other way as well: enter an exit multiple from comparables and read off what perpetuity growth it corresponds to.

Then sanity-check the growth-to-WACC spread. Terminal growth above about 3% for a mature developed-market business implies it eventually becomes a larger share of the economy without limit. Below zero implies gradual liquidation, which is a legitimate assumption for a declining asset but should be deliberate.

Finally, run the model at the boundaries. Take the WACC up and down a point and the terminal growth up and down half a point. If the equity value swings by a factor of two — and at a narrow spread it will — report a range rather than a point. Pair it with a relative-valuation cross-check and with the dividend discount model where the company pays out most of what it earns.

Terminal multiple implied by WACC and perpetuity growth

Each cell is (1 + g) ÷ (WACC − g) — the terminal value expressed as a multiple of final-year free cash flow. Use it to check whether your perpetuity assumption implies a multiple the market would actually pay.
Perpetuity growth	WACC 7%	WACC 8%	WACC 9%	WACC 10%	WACC 12%
0.0%	14.3×	12.5×	11.1×	10.0×	8.3×
1.0%	16.8×	14.4×	12.6×	11.2×	9.2×
2.0%	20.4×	17.0×	14.6×	12.8×	10.2×
2.5%	22.8×	18.6×	15.8×	13.7×	10.8×
3.0%	25.8×	20.6×	17.2×	14.7×	11.4×
4.0%	34.7×	26.0×	20.8×	17.3×	13.0×

Read across a row to see how much of your valuation is a bet on the discount rate. At 2.5% growth, moving the WACC from 9% to 7% raises the terminal multiple from 15.8x to 22.8x — a 44% increase in terminal value from two points of discount rate.

Mistakes that break a DCF

Discounting levered cash flow at the WACC. If your cash flow is after interest, you have already paid the lenders and the WACC double-counts the benefit of debt. Either strip interest out and use the WACC, or leave it in and use the cost of equity.
Mixing nominal cash flows with a real discount rate. A WACC built from nominal government bond yields must be applied to cash flows that include inflation, and the terminal growth rate must be nominal too.
Forgetting that the terminal year must be sustainable. If year five still has capital expenditure well above depreciation and working capital consuming cash, it is not a steady state and capitalising it into perpetuity overstates value. Normalise the terminal year before you apply the formula.
Setting terminal growth by feel. The growth rate and the reinvestment rate are linked: sustainable growth equals the reinvestment rate times the return on invested capital. Assuming 4% growth with no reinvestment assumes free money.
Using a stale share count. Diluted shares must include in-the-money options, restricted stock and convertible dilution as at the valuation date, not last year's cover page.
Netting off cash that is not really available. Cash trapped offshore, required as operating float, or pledged against obligations does not reduce net debt at face value.
Presenting one number. A DCF output is a distribution. Show the sensitivity grid across WACC and terminal growth alongside the point estimate.

What this calculator deliberately does not do

It applies a single compound growth rate across the forecast rather than accepting a bespoke cash flow for each year, so a business with a lumpy capital programme or a step change in margin needs a spreadsheet. It assumes a constant WACC, which is a simplification whenever leverage changes materially over the forecast. It ignores mid-period acquisitions, non-operating assets such as equity stakes and surplus property, and tax attributes such as net operating loss carryforwards — all of which are added to enterprise value separately in a full model. And it applies no minority discount, control premium or liquidity discount.

Where the DCF sits among valuation methods

A DCF is the only method that values a business on its own economics rather than by reference to what someone paid for something else. That is its strength and its weakness: it is honest about assumptions and completely dependent on them. Practitioners therefore triangulate.

Trading comparables apply a peer multiple to a current metric. They are fast, market-anchored, and inherit whatever the market currently believes about the sector. Precedent transactions use multiples paid in completed deals and therefore embed a control premium. Leveraged buyout analysis inverts the question, solving for the price a financial sponsor could pay while still hitting a target return; it typically sets a valuation floor. The football-field chart in any fairness opinion shows all four side by side, and a DCF sitting far outside the others is a prompt to re-examine the inputs, not evidence that everyone else is wrong.

Two structural cases need a different tool. For a company whose value is dividends rather than reinvestment — a regulated utility, a mature insurer — the Gordon growth dividend discount model is more direct, and for banks it is close to mandatory because enterprise value is not meaningful. For an early-stage business with negative cash flow through the whole forecast, the terminal value is effectively the entire valuation, and a venture method or scenario-weighted approach is more honest than a DCF whose answer is one assumption in disguise.

Whichever route you take, the discount rate deserves as much work as the cash flow. A WACC assembled from a CAPM cost of equity, an after-tax cost of debt and market-value weights is a chain of estimates, and the terminal value magnifies every one of them. When you are done, compare the modelled figure with the company's traded enterprise value today.

Key terms

Free cash flow to the firm (FCFF): Cash generated by operations after tax and after the investment needed to sustain them, but before any payment to lenders or shareholders. Also called unlevered free cash flow.
WACC: The weighted average cost of capital: the after-tax cost of debt and the cost of equity, weighted by their market values in the capital structure. It is the return the whole capital base requires.
Enterprise value: The value of the operating business to all capital providers. Equity market capitalisation plus debt, preferred and minority interest, less cash and equivalents.
Net debt: Total borrowings plus preferred stock and minority interest, less cash and marketable securities. It is the bridge from enterprise value to equity value.
Terminal value: The value at the end of the forecast horizon of all cash flows beyond it, computed either by capitalising a perpetuity or by applying an exit multiple.
Mid-year convention: Discounting each period's cash flow from the midpoint of the year rather than the end, reflecting cash that arrives continuously.

References

Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, 3rd ed. — Aswath Damodaran, John Wiley & Sons
Valuation: Measuring and Managing the Value of Companies, 7th ed. — McKinsey & Company Inc., Tim Koller, Marc Goedhart, David Wessels; John Wiley & Sons
CFA Program Curriculum, Equity Valuation: Applications and Processes / Discounted Dividend and Free Cash Flow Valuation — CFA Institute

DCF Enterprise Value Calculator

Calculator

It returns

The formula

What a discounted cash flow model actually values

The formula, term by term

Worked example: $100M of FCFF growing 6% for five years at a 9.5% WACC

How to read the result

Terminal multiple implied by WACC and perpetuity growth

Mistakes that break a DCF

Where the DCF sits among valuation methods

Key terms

Frequently asked questions

References

DCF Enterprise Value Calculator

Calculator

It returns

The formula

What a discounted cash flow model actually values

The formula, term by term

Worked example: $100M of FCFF growing 6% for five years at a 9.5% WACC

How to read the result

Terminal multiple implied by WACC and perpetuity growth

Mistakes that break a DCF

Where the DCF sits among valuation methods

Key terms

Frequently asked questions

References

Related calculators