Discounted cash flow
Case study · analyst-toolkit
A discounted cash flow where the terminal value is not allowed to hide.
Two sliders, the cost of capital and terminal growth. The headline share, the bar, the five year table and the line of arithmetic all follow them.
Problem
A discounted cash flow puts its answer in one cell, the perpetuity after the last forecast year is often the larger half of it, and setting terminal growth at or above the cost of capital still returns a number the spreadsheet is happy to print.
Method
Five forecast cash flows discounted on the end year convention, a Gordon growth perpetuity taken at the end of year five and brought back with the same year five discount factor, and a headline that is the share of the enterprise value the perpetuity contributes.
What it does
Two sliders, and every movement recomputes the headline share, one bar split between forecast and terminal present value, a table of the five years with their discount factors, and one line of arithmetic with its numbers substituted in.
What it refuses to do
It refuses to value a perpetuity that grows at or faster than the rate discounting it, and prints Refused in place of an enterprise value, because such a perpetuity has unbounded value.
It refuses the usual repair of clamping growth to just under the cost of capital, because the clamp swaps in a different model whose answer runs away as the clamp tightens.
The refusal is narrow: the five forecast years still discount normally, and it is only the perpetuity that has no answer.
It refuses to be a valuation, so there is no net debt, no share count, no currency, no per share figure, and the cash flows cannot be edited.
In closing
I built this because the argument in a valuation is usually about the forecast years, and the answer usually is not.