Discounted Cash Flow (DCF)

UFCF = EBIT × (1 − tax rate) + D&A − CapEx − Δ Working Capital.

We use unlevered (pre-interest) cash flow because we're valuing the whole business and will discount at the weighted average cost of capital (WACC), which already accounts for debt.

WACC = (E/V × Re) + (D/V × Rd × (1 − T)).

Re (cost of equity) comes from CAPM: Rf + β × ERP. Rd (cost of debt) is the company's after-tax borrowing cost. Weights are based on market values of equity and debt.

For a typical mature US company, WACC is roughly 8–10%.

Two methods: (1) Gordon Growth — TV = FCF(n+1) / (WACC − g), where g is perpetual growth (typically 2–3%, no higher than long-run GDP). (2) Exit Multiple — TV = EBITDA(n) × Exit Multiple.

Terminal value usually accounts for 60–80% of total DCF value, which is why DCFs are so sensitive to assumptions. Bankers run sensitivity tables on WACC and g.

Sum the discounted FCFs and discounted terminal value → Enterprise Value. Subtract net debt (debt − cash) and minority interests, add associates → Equity Value. Divide by diluted shares to get implied share price.

Sanity check: compare implied multiples (EV/EBITDA, P/E) to trading comps. If your DCF spits out 25x EBITDA on a utility company, something's wrong.