A discounted cash flow model says a business is worth the cash it will produce, discounted to today at a rate reflecting the risk of that cash. The calculator above builds one: it projects free cash flow with a growth rate that fades over a period you set, discounts each year separately, adds a terminal value computed both ways, and works down from enterprise value to equity value to a figure per share.
Arb Digital promotes the terminal value to the front of the results rather than burying it in a spreadsheet cell, because it decides most DCF outputs and most models hide it. Every rate, growth assumption and multiple here is an input you supply, and no output is a price target or a recommendation.
What This DCF Calculator Does
It performs a two-stage valuation. Stage one is the explicit projection: from a base-year free cash flow it grows the figure each year at a rate moving in a straight line from your year-one growth to your final-year growth, then discounts each year at your discount rate. Stage two is the terminal value — everything after the projection ends, computed under both a perpetuity growth and an exit multiple assumption.
Adding the two present values gives enterprise value, the value of the operating business to all capital providers. Subtracting net debt gives equity value, and dividing by the share count gives value per share. The calculator also runs each method against the other, reporting the exit multiple implied by your perpetuity growth rate and the growth rate implied by your exit multiple.
Two adjacent tools deserve a plain boundary. Our NPV calculator discounts a list of cash flows you already have against an initial outlay to answer a project accept-or-reject question — no terminal value, no share count, no capital structure. Our intrinsic value calculator is a per-share screen that runs one growth rate against owner earnings and compares the result to the market price. This page is the full modelling apparatus: a fading growth path, two terminal-value methods run against each other, a timing convention toggle, and a year-by-year view of where the present value comes from.
How to Use It
- Start with a defensible base-year free cash flow. Take it from the cash flow statement, and make sure it is unlevered if you are discounting at WACC. Our free cash flow calculator builds that figure.
- Set the projection period to the horizon over which you can genuinely say something about the business. Beyond that you are extrapolating, not forecasting.
- Set the growth path. A high year-one rate fading to a modest final-year rate is more honest than one flat rate held for a decade. Growth fades in every real business.
- Enter a discount rate you can justify. For an unlevered projection this is the weighted average cost of capital, which our WACC calculator derives from the cost of equity, the cost of debt and the capital mix.
- Run both terminal methods and compare using the implied cross-checks in the summary line. Two methods that agree is the only version of this model worth trusting.
The Formula and How It's Calculated
Each projected year's cash flow is FCFt = FCFt−1 × (1 + gt), where gt moves linearly from your year-one growth to your final-year growth. Its present value is PVt = FCFt ÷ (1 + r)t under the year-end convention, or divided by (1 + r)t−0.5 under the mid-year convention.
The perpetuity terminal value is TV = FCFN × (1 + g) ÷ (r − g), the standard Gordon growth formula, valued as at the end of year N and then discounted back over N years. The exit-multiple terminal value is simply TV = FCFN × multiple, discounted the same way. Enterprise value is the sum of the discounted projection plus the discounted terminal value; equity value is enterprise value minus net debt; per-share value is equity value divided by shares.
Work the defaults through. Base cash flow 500, five years, growth fading 8% to 4% in equal steps gives 8, 7, 6, 5 and 4 per cent, so the projected cash flows are 540.00, 577.80, 612.47, 643.09 and 668.82. At a 9% discount rate the year-end present values are 495.41, 486.32, 472.90, 455.52 and 434.69, summing to 2,344.85. The perpetuity terminal value is 668.82 × 1.025 ÷ 0.065 = 10,546.70 as at the end of year five, which discounted over five years at 9% is 6,854.63. Enterprise value is therefore 9,199.48, of which the terminal value is 6,854.63 — 74.5% of the total. Take off 800 of net debt and divide by 400 million shares and the model produces roughly $21.00 per share.
Now the cross-check. That terminal value is 15.8 times the final-year cash flow, so a 2.5% perpetuity growth rate is not the conservative assumption it looks like. Switch to the exit-multiple setting at 12 times and the terminal value falls to 8,025.78, implying perpetuity growth of about 0.6%. One assumption changed, and the answer moved by a fifth.
The Terminal Value Is Usually Most of the Answer
On the default inputs above, three quarters of enterprise value sits in the terminal value, and that proportion is typical: 60% to 80% is the usual range for a five-year window, and a high-growth business with a short explicit period can exceed 85%. The arithmetic is unavoidable — you modelled five years of cash, then asked one formula to value every year after that, for ever.
This has a consequence most DCF write-ups skip. The effort spent refining the projection — the revenue build, the margin path, the capital expenditure schedule — is refining the smaller share of the answer. The larger share is decided by two numbers: the discount rate, and either the terminal growth rate or the exit multiple. A model with a carefully argued five-year forecast and a casually chosen 3% perpetuity growth has spent its rigour in the wrong place.
The perpetuity formula is also unusually sensitive, because its denominator is a difference between two numbers that sit close together. At a 9% discount rate, moving terminal growth from 2.0% to 3.0% shifts the denominator from 7.0% to 6.0% — a 14% swing in terminal value from a one-point change nobody can verify. At 9% growth the formula divides by zero and the model reports infinity, which is its way of saying you have left the realm of finance.
So treat the terminal value share as a diagnostic, not an output. Above 80%, either lengthen the projection until more value sits inside the part you have actually thought about, or accept that what you built is not a cash flow forecast — it is a multiple, dressed as one.
Perpetuity Growth Versus Exit Multiple
The two methods fail in different ways. The perpetuity growth method asks what the business does for ever and requires you to believe a stable growth rate exists and that you know it. Its discipline is that the rate cannot exceed long-run nominal growth of the economy the company operates in, because a business outgrowing its economy for ever eventually becomes the economy.
The exit multiple method asks what a buyer would pay at the end of the projection. Its strength is that it is anchored to observable transactions. Its weakness is circularity: multiples are the market's compressed view of future cash flows, so a DCF closed with a market multiple has imported the market's opinion into a model built to form an independent one.
This is why the cross-check matters more than either method on its own. Compute both, then convert each into the other's units. A perpetuity growth rate that implies an exit multiple far above anything the sector trades at is telling you the growth rate is too high. An exit multiple that implies a perpetuity growth rate near zero or negative is telling you the multiple is too low for a business you have just forecast growing. The calculator prints both implied figures on every run so you never have to compute them separately. For sector context on trading multiples, our P/E ratio calculator handles the most common denominator.
The Discount Rate Does More Work Than You Think
The discount rate appears in every term of the model. It compounds against the projection and sits in the terminal value denominator, differenced against growth, so small changes propagate twice and hardest at the far end where the terminal value lives.
Two errors are common. The first is mismatching the rate to the cash flow: unlevered free cash flow, available to all capital providers before financing, is discounted at the weighted average cost of capital and gives enterprise value. Levered free cash flow, after interest and debt service, is discounted at the cost of equity and gives equity value directly. Discounting levered cash flow at WACC and then subtracting net debt counts the debt twice.
The second is picking a round number because it looks prudent. A 10% rate chosen because it feels conservative is not conservative, it is arbitrary — and where the terminal value is 75% of the answer, an arbitrary rate makes the whole output arbitrary. Derive it instead from the cost of equity, the after-tax cost of debt and their weights.
One more point, on timing: switching from year-end to mid-year discounting raises the valuation by roughly half the discount rate, because every cash flow is discounted for half a year less. On these defaults that is about four per cent, which is not a rounding detail.
Where a DCF Is the Wrong Tool
DCF assumes a business produces reasonably predictable cash. Several situations break that assumption badly enough that it should not be the primary method.
Businesses with negative free cash flow today put essentially all of their value in the terminal value, which is the same as saying the DCF is doing no work. Cyclical businesses valued at a peak or trough project from an unrepresentative base year, and the growth path compounds that error. Financial institutions, where debt is raw material rather than financing, do not fit an enterprise-value framework at all.
Where a projection is not credible, multiples are more honest about their own uncertainty: our business valuation calculator takes that route on revenue and earnings. For project-level decisions, the IRR calculator answers a question a per-share DCF was never designed to answer.
On terminal value specifically, the NYU Stern working paper Closure in Valuation: Estimating Terminal Value sets out the stable-growth constraint and the transition problem in full. The accounting standard IAS 36 Impairment of Assets defines value in use as exactly this calculation and constrains how it may be performed for financial reporting, which is a useful discipline even outside reporting. And the SEC's investor education guide How to Read a 10-K shows where in a filing the cash flow statement and the disclosures behind your inputs actually live.
Arb Digital builds the demand side of that forecast — the acquisition channels, the content and the conversion work that turn a growth assumption into revenue.
See Our Growth Services Talk To Our TeamCommon Mistakes to Avoid
- Never checking the terminal value share — if it is 80% of enterprise value, the projection is decorative and the model is really a multiple with extra steps.
- Setting terminal growth above long-run economic growth — a business cannot outgrow its economy for ever, and rates near the discount rate make the formula explode.
- Discounting levered cash flow at WACC and then subtracting net debt — that counts the debt twice. Levered cash flow goes with the cost of equity and gives equity value directly.
- Using one flat growth rate for a decade — growth fades in every real business, and a flat rate quietly hides an aggressive assumption in the later years.
- Reporting a single number — a DCF output is a point on a surface defined by two assumptions nobody can verify. Run both terminal methods and a rate range, and report what you find.
Related Free Tools From Arb Digital
Derive the discount rate with the WACC calculator, build the base-year cash flow with the free cash flow calculator, discount a plain project cash flow series with the NPV calculator, screen a share per-share with the intrinsic value calculator, sanity-check the exit multiple with the P/E ratio calculator, or discount a single future amount with the present value calculator. The free online tools hub lists every investing tool we publish.
Frequently Asked Questions
It values a business as the present value of the cash it is expected to produce. You project free cash flow over an explicit period, discount each year at a rate reflecting the risk of that cash, add a terminal value for everything beyond the projection, and subtract net debt to reach equity value.
An NPV calculator discounts a list of cash flows you already have against an initial outlay to answer a project accept-or-reject question. A DCF projects the cash flows itself, adds a terminal value for the period beyond the forecast, and converts the result into an enterprise value, an equity value and a figure per share.
Because the explicit projection covers a handful of years and the terminal value covers every year after that, for ever. Sixty to eighty per cent of enterprise value sitting in the terminal value is normal, which means the terminal assumptions decide most of the answer.
Compute both and compare. Perpetuity growth requires you to name a sustainable for-ever growth rate; an exit multiple anchors to observable transactions but imports the market's own view into your model. If the two disagree sharply, one of your assumptions is not defensible.
Whatever you can justify, subject to one hard constraint: it cannot exceed long-run nominal growth of the economy the business operates in, because a company growing faster than its economy for ever eventually becomes that economy. It must also stay below the discount rate or the formula breaks.
Match it to the cash flow. Unlevered free cash flow is discounted at the weighted average cost of capital and produces enterprise value. Levered free cash flow is discounted at the cost of equity and produces equity value directly, with no net debt subtraction.
It assumes cash arrives evenly through each year rather than in one lump at year end, so every cash flow is discounted for half a year less. It typically raises the valuation by roughly half the discount rate, which on a nine per cent rate is around four per cent.
When the cash flow forecast would be fiction: pre-profit companies, cyclical businesses valued at a peak or trough, early-stage firms with no representative base year, and financial institutions where debt is raw material rather than financing and the enterprise-value framework does not apply.
This page explains a standard valuation method for educational purposes only. It is not financial or investment advice, no output is a price target or a recommendation to buy or sell any security, every figure depends entirely on assumptions you supply, and the value of investments can fall as well as rise; consult a qualified financial professional.
