Practitioner-grade discounted cash flow methodology, worked examples, and 73 company WACC inputs pre-populated. The reference for the analyst who's building the model this afternoon and needs the conventions to hold up in front of the CFO tomorrow.
Enterprise Value = Σ [ Unlevered FCFt / (1 + WACC)t ] + Terminal Value / (1 + WACC)T
Every DCF is a variation on this. The five practitioner questions are: (1) how do you build unlevered FCF, (2) what WACC do you discount at, (3) what's the explicit forecast horizon, (4) what's the terminal value convention, and (5) how do you check the answer with a sensitivity grid. This page walks each.
| Line | Convention | Practitioner note |
|---|---|---|
| EBIT | Operating income, GAAP | Strip restructuring, impairments, and other non-recurring items if you can defend it. |
| × (1 − tax rate) | Marginal tax rate, not effective | Effective rate distorts by tax-planning benefits that may not repeat. |
| = NOPAT | Net operating profit after tax | The cash return on operating capital. |
| + D&A | Depreciation + amortization | Non-cash charges; add back. |
| − Capex | Capital expenditures | Maintenance + growth. For terminal year, maintenance capex only. |
| − ΔNWC | Change in net working capital | Rising NWC absorbs cash; falling NWC releases cash. |
| = Unlevered FCF | Cash available to all capital providers | Discount at WACC. |
TV = FCFT+1 / (WACC − g)
Assumes the business grows FCF at rate g forever. Reasonable when g is defensible — typically 2.0-3.0% for developed-market issuers (below long-run GDP + inflation). Never use g > WACC.
TV = EBITDAT+1 × Exit Multiple
Assumes the business trades at a defensible EBITDA multiple at horizon. Reasonable when peers are stable. Cross-check: implied g = WACC − FCFT+1/TV should be plausible.
The practitioner discipline: compute both. If they disagree by more than ~15%, one assumption is wrong — either your g is too high or your exit multiple is too rich. Reconcile before defending the model.
Illustrative implied EV / EBITDA multiple for a business with a NOPAT margin of 20%, D&A + capex + ΔNWC that nets to 60% NOPAT conversion, and a 5-year explicit forecast at 5% growth. Rows: WACC; columns: terminal growth g.
| WACC \ g | 1.0% | 2.0% | 2.5% | 3.0% | 4.0% |
|---|---|---|---|---|---|
| 7.0% | 14.2x | 17.1x | 19.1x | 21.6x | 29.4x |
| 8.0% | 12.0x | 14.0x | 15.3x | 16.8x | 21.0x |
| 9.0% | 10.4x | 11.8x | 12.7x | 13.7x | 16.2x |
| 10.0% | 9.2x | 10.3x | 10.9x | 11.6x | 13.3x |
| 11.0% | 8.3x | 9.1x | 9.6x | 10.1x | 11.3x |
| 12.0% | 7.5x | 8.2x | 8.5x | 8.9x | 9.8x |
The point of the grid isn't the specific multiples — it's the range. A 100-bps WACC error moves the terminal multiple by 15-25%. A 50-bps error in g moves it 5-10%. The two errors compound.
Trust the DCF when: unlevered FCF is stable and forecastable, WACC inputs are defensible against peers, terminal assumptions triangulate between Gordon Growth and exit multiple within ~15%, and the sensitivity grid produces a range you'd defend in front of an IC.
Override the DCF when: the business is early-stage with negative FCF for the forecast horizon (use a probability-weighted DCF or comps), when the terminal value is more than 75% of enterprise value (your explicit forecast is too short), or when the WACC is being materially pulled by a temporary capital structure that won't hold (normalize the D/E).
The Baratelli practitioner case memos walk full DCF valuations end-to-end, with the specific conventions above applied:
26 Excel tabs including a linked 3-statement model, DCF with Gordon Growth + exit multiple, sensitivity grids, LBO, Merger, Comps, Precedents, SOTP. Same practitioner conventions as this reference. $99, one-time, free updates.