Discounted Cash Flow Valuation

Estimate enterprise value through unlevered free cash flow and a risk-consistent discount rate.

D3 · Financial Modeling

Discounted Cash Flow Valuation

Estimate enterprise value through unlevered free cash flow and a risk-consistent discount rate.

Architecture Inputs Formula logic Worked example Controls Common errors Q&A

Model architecture

Forecast operating performance.
Calculate unlevered free cash flow.
Estimate WACC.
Compute terminal value.
Bridge enterprise value to equity value.

A professional model should make the decision logic visible. Inputs belong in a controlled assumption area; calculations should be formula-driven; outputs should state units, dates and scenarios; checks should be obvious and actionable.

Core inputs

Revenue and margin forecast
Tax rate
D&A, capex and working capital
Risk-free rate, beta and market premium
Terminal growth or exit multiple

Evidence rule: historical figures should reconcile to approved financial statements or management data. Forecast assumptions should show an owner, date, source and rationale.

Formula logic

Relationship	Use
`UFCF = EBIT × (1 − Tax) + D&A − Capex − ΔNWC`	Model formula / relationship
`PV = Cash flow ÷ (1 + WACC)^t`	Model formula / relationship
`Terminal value = Final-year UFCF × (1+g) ÷ (WACC−g)`	Model formula / relationship

Use the formulas as design relationships, not as substitutes for the accounting policy, contract definition or transaction facts relevant to the model.

Practical example

With final-year UFCF of ₹20 crore, 10% WACC and 5% perpetual growth, terminal value is ₹420 crore before discounting. The closeness of WACC and g makes the value highly sensitive.

How to implement

Load the historical base and reconcile it.
Put assumptions in dedicated cells.
Build the schedule from operational drivers.
Link outputs to financial statements and dashboards.
Run base, upside and downside checks.

Control checks

WACC exceeds perpetual growth
Terminal value share is disclosed
Forecast margins are economically plausible
Net debt and non-operating items are bridged
Sensitivity table is included

Finin2min crux: the model is credible only when a reviewer can trace a conclusion to evidence, assumptions and formula logic without guessing.

Common modeling errors

Discounting levered cash flow at WACC
Using nominal WACC with real cash flows
Subtracting interest in UFCF
Ignoring minority interests and investments
Selecting terminal growth above sustainable economy growth

Practical Q&A

Should the model contain all possible detail?

No. It should contain enough detail to answer the decision question and explain material risks. Excess detail can hide the drivers.

Should a formula ever contain a hardcoded number?

Only for constants that are genuinely universal or immaterial. Business assumptions should be linked to visible input cells.

What is the minimum review standard?

Reconcile historical data, test key formulas independently, scan for hardcodes and errors, verify scenario switches, and review outputs under downside assumptions.

Source framework: ICAI Ind AS resources, notified accounting standards, Schedule III presentation principles, transaction documents and approved management data. The linked workbook templates are educational starting points, not valuation opinions.