Discounted cash flow (implied value)
A model of what a company's future free cash flow is worth today, with every assumption visible and yours to change.
Formula
Implied value per share = (PV of forecast FCF + PV of terminal value − net debt) ÷ shares Terminal value = final-year FCF × (1 + g) ÷ (r − g)
Inputs
- Revenue growth. Year 1 from this year's revenue estimate (else the last twelve months, else the 3-year CAGR), clamped to −20%…40%, straight-lined to the final year, which defaults to the terminal rate.
- FCF margin. Year 1 from the last reported free cash flow ÷ revenue, held flat by default.
- Discount rate r. The Treasury 10-year par yield + beta × a 4.5% equity risk premium, clamped to 5%–18% (4% risk-free if the curve has not been read).
- Terminal growth g. 2.5% by default, 4% at most.
- Years. 5 by default, 3 to 10.
How to read it
The terminal value is usually 70–85% of the answer, so most of it rests on assumptions about the far future. The bear and bull cases move growth by ∓6 points, the margin by ∓25% of the company's own (3 points at most) and the discount rate by ±1.5 points.
How to use it
Ask what the current price implies: move the assumptions until the implied value meets the price, then judge whether they are believable.
Limitations
An implied value, never a fair value or a target. Not applied to banks and insurers. Refused when there is no revenue, when the discount rate is not above terminal growth, when final-year cash flow is negative, or when net debt exceeds the whole business's value.
In Kereon
Investing · Valuation. A grid shows the implied value across discount rates (1-point steps) and terminal growth rates (½-point steps).
Also called: implied value, intrinsic value, fair value, bear case, bull case, wacc, terminal value, discount rate.