dcf-valuation-builder

name

dcf-valuation-builder

description

Builds a transparent Discounted Cash Flow (DCF) valuation with a 5-10 year forecast, terminal value, Weighted Average Cost of Capital (WACC) derivation, sensitivity tables, and a football-field summary. Use when valuing a company, business unit, acquisition target, or capital project; pressure-testing an investment thesis; preparing a board valuation memo; or stress-testing assumptions against precedent transactions and trading comparables.

DCF Valuation Builder

Defensible intrinsic-value modeling that holds up in an Investment Committee (IC), audit committee, or Mergers and Acquisitions (M&A) negotiation.

What this skill is

A structured, auditable workflow that turns a set of financial assumptions into a Discounted Cash Flow (DCF) model with explicit reasoning at every step. It builds the revenue and operating model bottoms-up, derives the Weighted Average Cost of Capital (WACC) from first principles, reconciles two terminal-value methods, and triangulates the output against trading and transaction comparables on a football field.

What it solves

• Hand-waved valuations where the discount rate is hardcoded and the terminal value drives everything
• Single-point answers that hide enormous sensitivity to a few inputs
• Force-fitting a number to a target price with no traceability
• Forecasts disconnected from operating drivers (revenue, margin, capital expenditure, working capital)
• Inability to defend assumptions when an Investment Committee (IC) or board pushes back

When to invoke

• Valuing a company, business unit, or Mergers and Acquisitions (M&A) target for an internal memo
• Building a fairness opinion or board valuation pack
• Stress-testing a sell-side or banker model
• Comparing strategic investment options on an apples-to-apples Net Present Value (NPV) basis
• Re-underwriting an existing investment after material new information

Phase 1: Scope and inputs

Before modeling, establish:

• Valuation date and fiscal-year convention
• Valuation purpose (M&A, fairness opinion, internal Internal Rate of Return (IRR) hurdle, restructuring, tax)
• Currency and inflation assumptions
• Forecast horizon (5 years default; 10 years for long-cycle assets like infrastructure, pharmaceuticals, energy)
• Available data: 3-5 years historical financials, management forecast, comparable set, recent transactions

Log every input source with file name, date, and confidence rating (High / Medium / Low).

Phase 2: Revenue build (bottoms-up)

Pick the right driver tree:

• Software as a Service (SaaS) or subscription: net new Annual Recurring Revenue (ARR) = (new logos × Annual Contract Value (ACV)) + (expansion − churn); revenue = beginning ARR + ½ × net new ARR
• Transactional or marketplace: Gross Merchandise Value (GMV) × take-rate
• Volume × price: units × Average Selling Price (ASP), broken by segment or geography
• Consumption: active users × Average Revenue Per User (ARPU) × engagement

Always show three scenarios - Base, Bull (+1 standard deviation), Bear (−1 standard deviation) - with explicit Compound Annual Growth Rate (CAGR) for each.

Phase 3: Operating model

Forecast each line as percent of revenue with a credible glide path to terminal margins:

Line item	Year 1	Year 5	Terminal	Convergence logic
Gross margin	X%	Y%	Z%	Mature peer benchmark
Sales and Marketing (S&M)	X%	Y%	Z%	Lifetime Value to Customer Acquisition Cost (LTV/CAC) discipline
Research and Development (R&D)	X%	Y%	Z%	Innovation intensity
General and Administrative (G&A)	X%	Y%	Z%	Operating leverage
Earnings Before Interest and Taxes (EBIT) margin	X%	Y%	Z%	Industry steady state

Build to Unlevered Free Cash Flow (UFCF):

UFCF = EBIT × (1 − tax rate) + Depreciation and Amortization (D&A) − capital expenditure − Δ Net Working Capital (NWC)

Validate that capital expenditure approximately equals D&A at terminal year (steady-state requirement).

Phase 4: WACC derivation

Show every input - never hardcode WACC.

Component	Value	Source
Risk-free rate (10-year U.S. Treasury)	x.xx%	Federal Reserve / Bloomberg
Equity Risk Premium (ERP)	x.xx%	Damodaran / Duff & Phelps
Levered beta	x.xx	Comparable companies, re-levered
Cost of equity via Capital Asset Pricing Model (CAPM)	x.xx%	Risk-free rate + β × ERP
Pre-tax cost of debt	x.xx%	Yield to Maturity (YTM) or synthetic credit rating
After-tax cost of debt	x.xx%	× (1 − tax rate)
Target debt / (debt + equity)	x.xx%	Industry median capital structure
WACC	x.xx%	Weighted sum

Add country risk premium and small-company size premium where applicable.

Phase 5: Terminal value

Use both methods and reconcile:

1. Gordon growth (perpetuity): Terminal Value (TV) = Free Cash Flow (FCF) at year n+1 / (WACC − g), with g ≤ long-run nominal Gross Domestic Product (GDP) growth
2. Exit multiple: TV = terminal-year Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) × peer median Enterprise Value / EBITDA (EV/EBITDA)

Show the implied perpetuity growth from the exit multiple, and the implied exit multiple from the perpetuity. Flag unrealistic values (g > 5%, exit multiple > 25×) and explain.

Phase 6: Discount and bridge to equity

• Use mid-year convention unless cash flows are seasonal
• Discount each year's UFCF plus TV to Present Value (PV) → Enterprise Value (EV)
• Bridge: Equity value = EV − debt − preferred equity − minority interest + cash + non-core assets
• Divide by diluted shares (treasury stock method) → implied share price

Phase 7: Sensitivity and football field

Produce a 2-way sensitivity on the top drivers (typically WACC × g, or WACC × terminal margin):

	g = 1.5%	g = 2.0%	g = 2.5%	g = 3.0%
WACC 8%	$xx	$xx	$xx	$xx
WACC 9%	$xx	$xx	$xx	$xx
WACC 10%	$xx	$xx	$xx	$xx

Triangulate on a football field: trading comparables, precedent transactions, 52-week trading range, Leveraged Buyout (LBO) floor, sum-of-the-parts.

Output

• One-page valuation memo with value range, midpoint, and recommended point estimate
• WACC build, terminal value reconciliation, and sensitivity table
• Football field with at least 3 cross-check methods
• Top 3 value drivers and top 3 risks (with downside cases quantified)
• Explicit list of "what would change the call"

Operating rules

Always

• Show every formula; no black-box outputs
• Tie every assumption to a source or benchmark
• Reconcile both terminal value methods
• Stress-test with a downside case where IRR < WACC
• Present a range, never a single point

Never

• Force-fit a target valuation
• Use a discount rate without showing CAPM derivation
• Assume perpetuity growth above long-run GDP
• Skip the bridge from EV to equity value
• Confuse equity value with enterprise value