i What this calculator does
A discounted cash flow model values a company as the present value of the cash it will produce. It is the most theoretically sound valuation method and the most sensitive to assumptions, which is the trade-off.
Three inputs decide almost everything: the growth rate, the discount rate, and the terminal growth rate. Change any one by a percentage point and the answer moves substantially, which is why a DCF is best used as a range rather than a number.
This calculator is for educational purposes only. Results are estimates and may vary depending on market conditions, spreads, commissions, platform settings, and exchange rates. It should not be considered financial advice.
Frequently asked questions
What discount rate should I use?
The weighted average cost of capital is the standard choice for valuing the whole firm. For a South African company that starts from the risk-free rate, which follows the long bond yield, plus an equity risk premium and the company's own risk. Anything from 11% to 16% is common here, and the rate matters more than almost any other input.
What terminal growth rate is reasonable?
It should not exceed the long-run growth of the economy, because a company growing faster than the economy forever would eventually become the economy. Something at or below expected long-run inflation plus real growth is defensible. Above that, the model is producing a number rather than an estimate.
Why is so much of the value in the terminal value?
Because five years of cash flow is a small part of a company's life. A terminal value of 60% to 75% of the total is normal. Above that, the valuation depends almost entirely on an assumption about a period nobody can forecast, which is worth knowing before acting on the result.
Should I use free cash flow or earnings?
Free cash flow, which is operating cash flow less capital expenditure. Earnings include non-cash items and exclude the capital a company must spend to keep operating. Cash is what can be returned to shareholders; earnings are an accounting view of it.
How accurate is a DCF?
It is precise and not necessarily accurate. The arithmetic is exact; the inputs are forecasts. The honest use is to run several scenarios and see what range of prices they support, then compare that range to the market price rather than treating one output as the answer.
Does this work for a bank?
Not well. Banks have no meaningful free cash flow in the usual sense because debt is part of the operating business rather than the funding. Dividend discount models or price to book are the conventional approaches for financials.
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