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DCF Model Skill

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What is a DCF?

A Discounted Cash Flow (DCF) analysis is a method of valuing a company based on the cash it is expected to generate in the future. The core idea rests on one of the most fundamental principles in finance: the time value of money — a dollar today is worth more than a dollar tomorrow, because you could invest that dollar today and earn a return on it. Here is the intuition: if someone offered you 100todayor100 today or 100 one year from now, you would take the 100today.Butwhatiftheyofferedyou100 today. But what if they offered you 100 today or 110oneyearfromnow?Nowyouneedtothinkaboutwhatreturnyoucouldearnonthat110 one year from now? Now you need to think about what return you could earn on that 100 in the meantime. If you could earn 5% risk-free, then 100todayisworth100 today is worth 105 in a year — so the $110 offer is better. This is discounting in reverse. A DCF works the same way, but for an entire company. You project how much free cash flow the company will generate over the next 5-10 years, then “discount” those future cash flows back to today’s value using a rate that reflects the riskiness of those cash flows (called the discount rate or WACC). The sum of all those discounted cash flows, plus a “terminal value” representing everything beyond your projection period, equals the company’s enterprise value. Quick numeric example: Suppose a company will generate 100Moffreecashflownextyear,andyouapplya10100M of free cash flow next year, and you apply a 10% discount rate. That 100M next year is worth 100M/1.10=∗∗100M / 1.10 = **90.9M** today. If the same company generates 110Mtheyearafter,thatisworth110M the year after, that is worth 110M / (1.10)^2 = $90.9M today as well. The farther out the cash flow, the less it is worth today — that is the time value of money at work. DCF is considered the gold standard for intrinsic valuation because it does not depend on what the market currently thinks a company is worth. Instead, it asks: “Based on what this company will actually earn, what should it be worth?” This makes it especially valuable when the market may be over- or under-pricing a company relative to its fundamentals.

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Detailed Worked Example

Let us walk through a complete, simplified DCF for WidgetCo, a fictional manufacturing company. Assumptions:
  • Last twelve months (LTM) revenue: $500M
  • LTM EBITDA margin: 20% (EBITDA = $100M)
  • Revenue growth: 12% Year 1, 10% Year 2, 8% Year 3, 6% Year 4, 5% Year 5
  • EBITDA margin: stable at 20%
  • Tax rate: 25%
  • D&A: 3% of revenue
  • CapEx: 5% of revenue
  • Change in NWC: 1% of incremental revenue
  • WACC: 10%
  • Terminal growth rate: 2.5%
  • Net debt: $150M
  • Diluted shares: 50M
1

Project Revenue

YearGrowthRevenue
LTM—$500.0M
112%$560.0M
210%$616.0M
38%$665.3M
46%$705.2M
55%$740.5M
2

Calculate Free Cash Flow

For Year 1:
EBIT = Revenue x EBITDA Margin - D&A = $560M x 20% - $560M x 3%
     = $112.0M - $16.8M = $95.2M
NOPAT = EBIT x (1 - Tax Rate) = $95.2M x 0.75 = $71.4M
(+) D&A = $16.8M
(-) CapEx = $560M x 5% = $28.0M
(-) Change in NWC = ($560M - $500M) x 1% = $0.6M
= Unlevered FCF = $71.4M + $16.8M - $28.0M - $0.6M = $59.6M
Full FCF schedule:
YearRevenueEBITNOPATD&ACapExdNWCuFCF
1$560.0M$95.2M$71.4M$16.8M$28.0M$0.6M$59.6M
2$616.0M$104.7M$78.5M$18.5M$30.8M$0.6M$65.7M
3$665.3M$113.1M$84.8M$20.0M$33.3M$0.5M$71.0M
4$705.2M$119.9M$89.9M$21.2M$35.3M$0.4M$75.4M
5$740.5M$125.9M$94.4M$22.2M$37.0M$0.4M$79.3M
3

Discount Cash Flows (Mid-Year Convention)

Using mid-year convention, discount periods are 0.5, 1.5, 2.5, 3.5, 4.5:
YearuFCFPeriodDiscount Factor (1/1.10^n)PV of FCF
1$59.6M0.50.9535$56.8M
2$65.7M1.50.8668$56.9M
3$71.0M2.50.7880$55.9M
4$75.4M3.50.7164$54.0M
5$79.3M4.50.6512$51.6M
Total$275.3M
4

Calculate Terminal Value

Terminal Value = Year 5 FCF x (1 + g) / (WACC - g)
               = $79.3M x 1.025 / (0.10 - 0.025)
               = $81.3M / 0.075
               = $1,083.7M
Discount the terminal value back to today (at period 4.5 for mid-year):
PV of TV = $1,083.7M x 0.6512 = $705.7M
Sanity check: TV as % of EV = 705.7M/(705.7M / (275.3M + $705.7M) = 72%. This is within the 50-70% guideline but on the high end — acceptable for a stable business but worth noting.
5

Bridge to Equity Value

Enterprise Value = PV of FCFs + PV of Terminal Value
                 = $275.3M + $705.7M = $981.0M

(-) Net Debt = $150.0M
= Equity Value = $831.0M

/ Diluted Shares = 50M
= Implied Price per Share = $16.62
If the current stock price is $14.00, the DCF implies 18.7% upside.

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Why It Matters

DCF analysis is used across virtually every corner of finance:
  • Investment bankers build DCFs to advise clients on fair valuations for mergers, acquisitions, and IPOs. A buyer wants to know “what is this company actually worth?” before offering a price.
  • Equity researchers use DCFs to generate price targets for stocks. If the DCF implies a price significantly above the current stock price, the analyst might recommend buying.
  • Private equity firms use DCFs alongside LBO models to evaluate whether an acquisition will generate acceptable returns.
  • Corporate finance teams use DCFs to evaluate capital projects — should we build a new factory? Launch a new product? The DCF answers whether the future cash flows justify the investment.
What happens if you do it poorly? At best, you make a bad investment recommendation. At worst, you advise a client to pay billions of dollars too much for an acquisition — or miss a deal that would have created significant value.

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Key Concepts

TermDefinitionWhy It Matters
Free Cash Flow (FCF)Cash generated by the business after all operating expenses and capital investments. Calculated as EBIT x (1 - Tax Rate) + D&A - CapEx - Change in Working Capital.This is the cash actually available to investors — it is what you are valuing in a DCF.
WACCWeighted Average Cost of Capital. The blended rate of return required by both equity and debt investors, weighted by the company’s capital structure.This is your discount rate — it reflects how risky the company’s cash flows are. Higher risk = higher WACC = lower present value.
Terminal ValueThe value of all cash flows beyond your explicit projection period. Calculated using either the perpetuity growth method or exit multiple method.Typically represents 50-70% of total enterprise value. Getting this wrong can swing the entire valuation.
Discount FactorThe multiplier used to convert a future cash flow to its present value. Equals 1 / (1 + WACC)^n where n is the time period.This is the mechanical step that implements the time value of money.
Enterprise Value (EV)The total value of the business — equity plus net debt. The sum of PV of projected FCFs + PV of terminal value.This is the headline output of the DCF before bridging to equity value.
Equity ValueEnterprise Value minus net debt. Divided by shares outstanding to get implied price per share.This is what you compare to the current stock price to determine if the company is over- or under-valued.
CAPMCapital Asset Pricing Model. Used to calculate the cost of equity: Risk-Free Rate + Beta x Equity Risk Premium.Provides a theoretically grounded way to estimate what return equity investors require for bearing this company’s risk.
BetaA measure of a stock’s volatility relative to the overall market. Beta of 1.0 = moves with the market. Beta > 1.0 = more volatile.Higher beta means higher cost of equity, which means higher WACC, which means lower valuation — all else equal.
Sensitivity AnalysisTables showing how the valuation changes when you vary key assumptions (WACC, terminal growth rate, exit multiple).No DCF assumption is certain. Sensitivity tables show the range of reasonable outcomes and which assumptions matter most.

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How It Works

Triggers automatically when: users need to value a company using DCF methodology, request intrinsic value analysis, or ask for detailed financial modeling with growth projections and terminal value calculations.
Formulas over hardcodes is non-negotiable. Every projection, margin, discount factor, PV, and sensitivity cell MUST be a live Excel formula. The model must flex when the user changes an assumption. When using openpyxl, write ws["D20"] = "=D19*(1+$B$8)" — never ws["D20"] = calculated_revenue.

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Environment: Office JS vs Python/openpyxl

Use Office JS directly. Write formulas via range.formulas = [["=D19*(1+$B$8)"]]. No separate recalc step needed; Excel calculates natively. Use range.format.* for styling. Never use range.values for derived cells.Merged cell pitfall: Do NOT call .merge() then set .values on the merged range — it throws InvalidArgument. Instead write value to the top-left cell alone, then merge and format:
ws.getRange("A7").values = [["MARKET DATA & KEY INPUTS"]];
const hdr = ws.getRange("A7:H7");
hdr.merge();
hdr.format.fill.color = "#1F4E79";
hdr.format.font.bold = true;
hdr.format.font.color = "#FFFFFF";

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Step 1: Data Retrieval and Validation

Data Source Priority:
  1. MCP Servers (if configured) — Daloopa, FactSet, S&P Global, Morningstar
  2. User-Provided Data — Historical financials from their research
  3. Web Search/Fetch — Current prices, beta, debt and cash when needed
Validation Checklist:
  • Verify net debt vs. net cash (critical for valuation)
  • Confirm diluted shares outstanding (check for recent buybacks/issuances)
  • Validate historical margins are consistent with business model
  • Cross-check revenue growth rates with industry benchmarks
  • Verify tax rate is reasonable (typically 21-28%)
Cell Comments: Add cell comments AS each hardcoded value is created. Format: "Source: [System/Document], [Date], [Reference], [URL if applicable]". Every blue input must have a comment before moving to the next section.

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Step 2: Historical Analysis (3-5 Years)

Before projecting the future, you need to understand the past. Analyze:
  • Revenue growth trends: Calculate CAGR, identify drivers
  • Margin progression: Track gross margin, EBIT margin, FCF margin
  • Capital intensity: D&A and CapEx as % of revenue
  • Working capital efficiency: NWC changes as % of revenue growth
  • Return metrics: ROIC, ROE trends

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Step 3: Revenue Projections

Revenue is the top line that drives everything else. The projection should reflect a gradual moderation from current growth toward a sustainable long-term rate:
  • Year 1-2: Higher growth reflecting near-term visibility
  • Year 3-4: Gradual moderation toward industry average
  • Year 5+: Approaching terminal growth rate
Three-scenario approach:
ScenarioRevenue Growth
Bear CaseConservative (e.g., 8-12%)
Base CaseMost likely (e.g., 12-16%)
Bull CaseOptimistic (e.g., 16-20%)
Use scenario blocks with IF formulas: =IF($B$6=1,[Bear cell],IF($B$6=2,[Base cell],[Bull cell])) so the entire model flexes when the scenario selector changes.

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Step 4: Operating Expense Modeling

Model each expense line as a percentage of revenue, with operating leverage (percentages declining as revenue scales):
  • Sales & Marketing: 15-40% of revenue
  • Research & Development: 10-30% for technology companies
  • General & Administrative: 8-15% of revenue

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Step 5: Free Cash Flow Calculation

EBIT
(-) Taxes (EBIT x Tax Rate)
= NOPAT (Net Operating Profit After Tax)
(+) D&A (non-cash expense, % of revenue)
(-) CapEx (% of revenue, typically 4-8%)
(-) Change in NWC (change in working capital)
= Unlevered Free Cash Flow

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Step 6: WACC Calculation

Cost of Equity (using CAPM): 
Cost of Equity = Risk-Free Rate + Beta x Equity Risk Premium

Where:
- Risk-Free Rate = Current 10-Year Treasury Yield
- Beta = 5-year monthly stock beta vs market index
- Equity Risk Premium = 5.0-6.0% (market standard)
After-Tax Cost of Debt: 
After-Tax Cost of Debt = Pre-Tax Cost of Debt x (1 - Tax Rate)
WACC Formula: 
WACC = (Cost of Equity x Equity Weight) + (After-Tax Cost of Debt x Debt Weight)
Worked WACC Example: 
Risk-Free Rate = 4.0%
Beta = 1.2
ERP = 5.5%
Cost of Equity = 4.0% + 1.2 x 5.5% = 10.6%

Pre-Tax Cost of Debt = 5.5%
Tax Rate = 25%
After-Tax Cost of Debt = 5.5% x (1 - 0.25) = 4.125%

Market Cap = $800M (equity weight = 80%)
Market Value of Debt = $200M (debt weight = 20%)

WACC = (10.6% x 0.80) + (4.125% x 0.20) = 8.48% + 0.825% = 9.3%
Typical WACC Ranges:
Company TypeWACC Range
Large Cap, Stable7-9%
Growth Companies9-12%
High Growth/Risk12-15%

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Step 7: Discounting Cash Flows

Use mid-year convention (cash flows assumed to occur mid-year):
  • Discount Period: 0.5, 1.5, 2.5, 3.5, 4.5
  • Discount Factor = 1 / (1 + WACC)^Period

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Step 8: Terminal Value

Perpetuity Growth Method (Preferred): 
Terminal Value = Final Year FCF x (1 + Terminal Growth Rate) / (WACC - Terminal Growth Rate)

Critical: Terminal Growth < WACC
Exit Multiple Method (Cross-Check): 
Terminal Value = Final Year EBITDA x Exit EV/EBITDA Multiple
Terminal Growth Rate Selection:
ApproachRange
Conservative2.0-2.5% (GDP growth rate)
Moderate2.5-3.5%
Aggressive3.5-5.0% (market leaders only)
Sanity Check: Terminal value should represent 50-70% of enterprise value. If >75%, the model may be over-reliant on terminal assumptions.

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Step 9: Enterprise to Equity Value Bridge

(+) Sum of PV of Projected FCFs
(+) PV of Terminal Value
= Enterprise Value

(-) Net Debt [or + Net Cash]
= Equity Value

/ Diluted Shares Outstanding
= Implied Price per Share

vs. Current Stock Price
= Implied Return

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Step 10: Sensitivity Analysis

Build three sensitivity tables:
  1. WACC vs. Terminal Growth — How the valuation changes with different discount rates and long-term growth assumptions
  2. Revenue Growth vs. EBIT Margin — Impact of top-line growth and operating leverage
  3. Beta vs. Risk-Free Rate — Sensitivity to cost of equity components
Requirements:
  • Use odd dimensions (5x5 or 7x7) for a true center cell
  • Center cell = base case (highlighted in medium-blue #BDD7EE with bold font)
  • Every cell must contain a full DCF recalculation formula
  • Axis values symmetric around base case (e.g., if base WACC = 9.0%, axis = [7.0%, 8.0%, 9.0%, 10.0%, 11.0%])
  • Use openpyxl or Office JS loops to write formulas programmatically — no placeholders or manual steps

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Model Layout Planning

Define ALL section row positions BEFORE writing any formulas. Write ALL headers and labels first, then section dividers, THEN formulas using locked row positions. This prevents row-reference errors that cascade through the entire model.

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Step-by-Step User Verification

Do NOT build the entire model end-to-end. Verify with the user at each checkpoint:
1

After Data Retrieval

Show raw inputs (revenue, margins, shares, net debt). Confirm before projecting.
2

After Revenue Projections

Show projected top line and growth rates. Confirm before building margin build.
3

After FCF Build

Show full FCF schedule. Confirm logic before computing WACC.
4

After WACC

Show calculation and inputs. Confirm before discounting.
5

After Terminal Value + PV

Show equity bridge (EV to equity value to per share). Confirm before sensitivity tables.
6

After Sensitivity Tables

Verify center cell equals base case. Confirm all values vary as expected.

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Formatting Standards

Fill Color Palette (Professional Blues and Greys):
ElementFill ColorFont
Section headersDark blue #1F4E79White bold
Column headersLight blue #D9E1F2Black bold
Input cellsLight grey #F2F2F2 or whiteBlue #0000FF
Formula cellsWhiteBlack
Key outputs (EV, equity value, share price)Medium blue #BDD7EEBlack bold
Number Formatting:
  • Currency: $#,##0;($#,##0) or $#,##0.0
  • Percentages: 0.0%
  • Multiples: 0.0"x"
  • All numeric cells right-aligned

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Formula Recalculation

Run python recalc.py model.xlsx 30 before delivery. Fix ALL errors until status is “success.” Zero formula errors required.

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Common Mistakes

The mistake: Your explicit projection period is too short or too conservative, causing the terminal value to represent an outsized share of total enterprise value.Why it happens: If projected FCFs grow slowly but the terminal growth rate is 3%, most of the value gets pushed into the terminal period.The fix: Extend the projection period to 7-10 years so more value is captured in explicit cash flows. Alternatively, check whether your near-term growth assumptions are too conservative relative to the company’s actual trajectory.
The mistake: Using book value of equity (from the balance sheet) instead of market capitalization to calculate the equity weight in WACC.Why it happens: Book equity is easily available on the balance sheet. Market cap requires looking up the current stock price.The fix: Always use market values. Equity weight = Market Cap / (Market Cap + Market Value of Debt). Book equity is irrelevant for WACC because investors earn returns on market values, not book values.
The mistake: Deducting interest expense when calculating unlevered free cash flow.Why it happens: Confusion between levered and unlevered FCF. Interest expense appears on the income statement, so it feels natural to include it.The fix: Start with EBIT (before interest), apply taxes at the marginal rate, then add back D&A and subtract CapEx and working capital changes. Interest is accounted for in the WACC through the cost of debt — including it in FCF double-counts it.
The mistake: Using after-tax cost of debt in WACC AND deducting a separate tax shield from cash flows.Why it happens: The tax benefit of debt can be captured either in the discount rate (after-tax cost of debt in WACC) or in the cash flows (adding the interest tax shield to FCF). Doing both counts it twice.The fix: Pick one approach. The standard approach is to use after-tax cost of debt in WACC and use unlevered FCF (no tax shield in cash flows).
The mistake: Setting the terminal growth rate at 4-5% when long-term nominal GDP growth is approximately 2-3%.Why it happens: Anchoring on the company’s current growth rate, which may be 15-20%, and choosing a terminal rate that feels like a reasonable “slowdown.”The fix: No company can grow faster than the economy forever — eventually it would become the economy. Terminal growth rates should be at or below long-term nominal GDP growth (2-3%). Only market-defining companies with strong secular tailwinds justify rates above 3%.
The mistake: Adding the terminal value directly to the sum of discounted FCFs without discounting it.Why it happens: The terminal value calculation produces a large number at the end of the projection period. It is easy to forget that this value is as-of Year 5, not as-of today.The fix: Discount the terminal value by the same factor as the final year’s cash flow: PV of TV = TV / (1 + WACC)^n, where n is the final discount period (4.5 with mid-year convention).
The mistake: Presenting a DCF-implied valuation without cross-referencing it against comparable company multiples.Why it happens: The DCF is seen as an “intrinsic” method that stands on its own. But extreme deviations from market multiples deserve scrutiny.The fix: After computing the DCF-implied enterprise value, calculate the implied EV/EBITDA and EV/Revenue multiples. If your DCF implies 25x EBITDA when the peer median is 12x, revisit your assumptions.
The mistake: Computing a value in Python and writing the result to a cell instead of writing the formula string.Why it happens: It feels faster to compute revenue * margin in Python and write the number. But the resulting model is static.The fix: Every derived cell must contain a formula. Write ws["D20"] = "=D19*(1+$B$8)", not ws["D20"] = 627.2. The model must update automatically when any assumption changes.
The mistake: Discounting Year 1 cash flow at period 1.0 instead of 0.5.Why it happens: End-of-year is simpler and some textbooks teach it as the default.The fix: Cash flows occur throughout the year, not on December 31. Mid-year convention (periods 0.5, 1.5, 2.5…) better reflects reality and produces a slightly higher (more accurate) valuation. Most investment banks use mid-year convention as standard.
The mistake: Using basic shares outstanding instead of diluted shares, or using an outdated share count that does not reflect recent buybacks or issuances.Why it happens: The diluted share count requires checking for stock options, RSUs, convertible securities, and recent transactions. Basic shares are easier to find.The fix: Always use the fully diluted share count. Check the most recent 10-Q for the treasury stock method diluted share count, and adjust for any subsequent buybacks or issuances announced in press releases or 8-Ks.

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Daily Workflow

You cover a mid-cap software company that just reported Q4 earnings. Revenue came in at 1.2B(aheadofyour1.2B (ahead of your 1.15B estimate), and management raised FY guidance. You need to update your DCF model to generate a new price target.Workflow:
  1. Update historical actuals with the new Q4 data (revenue, margins, CapEx)
  2. Revise your revenue growth assumptions for Years 1-5 to reflect the guidance raise
  3. Check whether the beat changes your margin trajectory assumptions
  4. Update the current stock price, 10-year Treasury yield, and beta
  5. Recalculate WACC if cost of equity inputs changed materially
  6. Run the model and compare the new implied price to the prior target
  7. Build a sensitivity table showing the range of outcomes under different growth/margin scenarios
  8. Draft the price target revision note explaining which assumptions changed and why
Your client (a strategic acquirer) is considering acquiring a privately held competitor. The managing director asks you to build a standalone DCF to establish a fair value range before the client makes an offer.Workflow:
  1. Gather the target’s historical financials from the CIM (Confidential Information Memorandum)
  2. Build revenue projections using the target’s historical CAGR and management’s forward guidance
  3. Model operating expenses to reflect margin improvement from scale (the acquirer’s thesis)
  4. Calculate WACC using public comps’ betas as a proxy (the target is private)
  5. Build the DCF with Bear/Base/Bull scenarios reflecting different integration outcomes
  6. Present a valuation range (e.g., 800M−800M-1.1B) with the sensitivity tables showing which assumptions drive the range
  7. Cross-check against precedent transaction multiples and public comps
The CFO is evaluating whether to invest 50Minanewproductionfacility.Thefacilityisexpectedtogenerateincrementalrevenueof50M in a new production facility. The facility is expected to generate incremental revenue of 30M/year growing at 5% annually, with 25% EBITDA margins.Workflow:
  1. Project the incremental cash flows from the facility over 10 years
  2. Use the company’s existing WACC as the discount rate (since the facility has similar risk)
  3. Calculate NPV: PV of incremental FCFs minus the $50M upfront investment
  4. If NPV is positive, the project creates value. If negative, the capital is better deployed elsewhere.
  5. Build a sensitivity table on revenue ramp and EBITDA margin to show the breakeven assumptions
  6. Present to the CFO with a clear recommendation and the range of outcomes

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Practice Exercise

Scenario: You are asked to value TechServ Inc., a B2B SaaS company. Given Information:
  • LTM Revenue: $200M, growing 25% YoY
  • LTM EBITDA: $30M (15% margin)
  • Management guides FY+1 revenue of $240M and expects EBITDA margins to expand to 18% by Year 3
  • Tax rate: 22%
  • D&A: 4% of revenue; CapEx: 6% of revenue
  • Change in NWC: 2% of incremental revenue
  • Current stock price: 45.00;Dilutedshares:30M;Netcash:45.00; Diluted shares: 30M; Net cash: 50M
  • Risk-free rate: 4.2%; Beta: 1.35; ERP: 5.5%; No debt
Your task:
  1. Project revenue for 5 years (Year 1: $240M per guidance, then moderate growth toward 10% by Year 5)
  2. Model EBITDA margin expansion from 15% to 18% by Year 3, stable thereafter
  3. Calculate unlevered FCF for each year
  4. Calculate WACC (note: no debt, so WACC = cost of equity)
  5. Discount FCFs and calculate terminal value (use 3.0% terminal growth)
  6. Bridge to equity value (remember: net cash of $50M is added, not subtracted)
  7. Calculate implied price per share and compare to $45.00 market price
  8. Build a 5x5 sensitivity table (WACC vs. terminal growth rate)
With no debt, WACC = Cost of Equity = 4.2% + 1.35 x 5.5% = 11.625%. This is unusually high and will compress the valuation. Consider whether a 1.35 beta is appropriate for a B2B SaaS company with recurring revenue.

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How to Add to Your Local Context

1

Install the Plugin

claude plugin install financial-analysis@financial-services-plugins
2

Customize WACC Methodology

Edit skills/dcf-model/SKILL.md to specify your firm’s WACC conventions:
## Firm-Specific DCF Conventions
- Beta: Use 2-year weekly raw beta, not 5-year monthly
- ERP: Use Duff & Phelps Supply-Side ERP (currently 5.5%)
- Size premium: Apply Duff & Phelps size premium based on market cap decile
- Terminal growth rate: Never exceed 3.0% without MD approval
3

Configure Data Sources

Edit .mcp.json to point to your preferred data providers:
{
  "mcpServers": {
    "factset": {
      "url": "https://mcp.factset.com/mcp",
      "headers": {
        "Authorization": "Bearer YOUR_FACTSET_API_KEY"
      }
    }
  }
}
4

Add Scenario Conventions

If your firm uses specific scenario assumptions, add them:
## Scenario Conventions
- Bear Case: consensus revenue minus 2 standard deviations
- Base Case: consensus revenue estimates
- Bull Case: management high-end guidance

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Common Pitfalls

These are the most common mistakes in DCF analysis:
  • Terminal value dominates — If TV > 75% of EV, your explicit projections may be too short or too conservative. Consider extending the projection period.
  • WACC uses book values — Capital structure weights should use market values (market cap for equity, market value of debt), not book values.
  • FCF includes interest — Free cash flow should be unlevered (before interest). Interest is accounted for in WACC.
  • Tax shield double-counted — If you use after-tax cost of debt in WACC, do not also deduct a tax shield from cash flows.
  • Terminal growth > GDP growth — A company cannot grow faster than the economy forever. Terminal growth rates above 3-4% require strong justification.
  • Not verifying with comps — A DCF that implies a company trades at 3x the peer median EV/EBITDA should trigger a re-examination of assumptions.