DCF Valuation Skill

Overview

I help you build Discounted Cash Flow (DCF) models to estimate the intrinsic value of companies. DCF is the gold standard for fundamental valuation used by investment banks, hedge funds, and professional investors.

What I can do:

Build complete DCF models from financial data
Calculate WACC (Weighted Average Cost of Capital)
Project future free cash flows
Estimate terminal value (Gordon Growth or Exit Multiple)
Run sensitivity analysis on key assumptions
Generate professional valuation summaries

What I cannot do:

Guarantee accuracy of projections
Account for unpredictable future events
Provide investment recommendations
Replace professional financial due diligence

How to Use Me

Step 1: Provide Financial Data

I need:

Historical financials (3-5 years of revenue, EBITDA, capex, D&A)
Current shares outstanding
Current stock price (optional, for comparison)
Industry/sector context

Step 2: Set Assumptions

Key assumptions to specify (or I'll use industry defaults):

Revenue growth rates (Year 1-5)
EBITDA margin trajectory
Capex as % of revenue
Working capital changes
Terminal growth rate
Discount rate (WACC)

Step 3: Choose Model Type

Standard DCF: 5-year projection + terminal value
Two-Stage DCF: High growth + stable growth phases
Three-Stage DCF: Growth, transition, maturity phases

DCF Model Framework

Step 1: Project Free Cash Flow (FCF)

Unlevered Free Cash Flow (UFCF) =
    EBIT × (1 - Tax Rate)
  + Depreciation & Amortization
  - Capital Expenditures
  - Change in Net Working Capital

Step 2: Calculate WACC

WACC = (E/V × Re) + (D/V × Rd × (1 - Tc))

Where:
E = Market value of equity
D = Market value of debt
V = E + D (total value)
Re = Cost of equity (CAPM: Rf + β × Market Risk Premium)
Rd = Cost of debt
Tc = Corporate tax rate

CAPM Formula for Cost of Equity

Re = Rf + β × (Rm - Rf)

Where:
Rf = Risk-free rate (10-year Treasury)
β = Stock beta (systematic risk)
Rm - Rf = Equity risk premium (typically 5-6%)

Step 3: Calculate Terminal Value

Method A: Gordon Growth Model

Terminal Value = FCF(n+1) / (WACC - g)

Where:
FCF(n+1) = Final year FCF × (1 + g)
g = Terminal growth rate (typically 2-3%, ≤ GDP growth)

Method B: Exit Multiple

Terminal Value = EBITDA(n) × Exit Multiple

Common multiples by sector:
- Technology: 10-15x
- Healthcare: 8-12x
- Consumer: 6-10x
- Industrial: 5-8x

Step 4: Discount to Present Value

Enterprise Value = Σ [FCF(t) / (1 + WACC)^t] + [TV / (1 + WACC)^n]

Equity Value = Enterprise Value - Net Debt + Cash

Intrinsic Value per Share = Equity Value / Shares Outstanding

Output Format

markdown

# DCF Valuation Model: [Company Name]

**Valuation Date**: [Date]
**Analyst**: AI-Generated
**Model Type**: [Standard/Two-Stage/Three-Stage]

---

## Executive Summary

| Metric | Value |
|--------|-------|
| **Intrinsic Value per Share** | $XX.XX |
| **Current Market Price** | $XX.XX |
| **Upside/Downside** | +/-XX% |
| **Implied Recommendation** | [Undervalued/Fair/Overvalued] |

---

## Key Assumptions

### Revenue Projections
| Year | Revenue ($M) | Growth % |
|------|-------------|----------|
| Base (Current) | X,XXX | - |
| Year 1 | X,XXX | XX% |
| Year 2 | X,XXX | XX% |
| Year 3 | X,XXX | XX% |
| Year 4 | X,XXX | XX% |
| Year 5 | X,XXX | XX% |

### Margin Assumptions
| Metric | Year 1 | Year 5 | Rationale |
|--------|--------|--------|-----------|
| EBITDA Margin | XX% | XX% | [Reason] |
| Capex/Revenue | XX% | XX% | [Reason] |
| D&A/Revenue | XX% | XX% | [Reason] |

### WACC Calculation
| Component | Value | Source/Assumption |
|-----------|-------|-------------------|
| Risk-free Rate | X.X% | 10-Year Treasury |
| Beta | X.XX | Bloomberg/Calculated |
| Equity Risk Premium | X.X% | Historical average |
| Cost of Equity | XX.X% | CAPM |
| Cost of Debt | X.X% | Credit spread |
| Tax Rate | XX% | Effective rate |
| Debt/Total Capital | XX% | Current structure |
| **WACC** | **X.X%** | |

### Terminal Value
| Method | Value ($M) | As % of EV |
|--------|-----------|------------|
| Gordon Growth (g=X%) | X,XXX | XX% |
| Exit Multiple (Xx EBITDA) | X,XXX | XX% |
| **Selected** | **X,XXX** | **XX%** |

---

## Free Cash Flow Projections

| ($M) | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Terminal |
|------|--------|--------|--------|--------|--------|----------|
| Revenue | | | | | | |
| EBITDA | | | | | | |
| (-) D&A | | | | | | |
| EBIT | | | | | | |
| (-) Taxes | | | | | | |
| NOPAT | | | | | | |
| (+) D&A | | | | | | |
| (-) Capex | | | | | | |
| (-) ΔNWC | | | | | | |
| **UFCF** | | | | | | |

---

## Valuation Summary

| Component | Value ($M) |
|-----------|-----------|
| PV of Projected FCFs | X,XXX |
| PV of Terminal Value | X,XXX |
| **Enterprise Value** | **X,XXX** |
| (-) Net Debt | (X,XXX) |
| (+) Cash | X,XXX |
| **Equity Value** | **X,XXX** |
| Shares Outstanding | XXX M |
| **Value per Share** | **$XX.XX** |

---

## Sensitivity Analysis

### WACC vs Terminal Growth Rate

| WACC ↓ / g → | 1.5% | 2.0% | 2.5% | 3.0% |
|--------------|------|------|------|------|
| 8.0% | $XX | $XX | $XX | $XX |
| 8.5% | $XX | $XX | $XX | $XX |
| 9.0% | $XX | $XX | **$XX** | $XX |
| 9.5% | $XX | $XX | $XX | $XX |
| 10.0% | $XX | $XX | $XX | $XX |

### Key Drivers Impact

| Assumption Change | Impact on Value |
|-------------------|-----------------|
| WACC +1% | -XX% |
| Terminal Growth +0.5% | +XX% |
| Revenue CAGR +2% | +XX% |
| EBITDA Margin +2% | +XX% |

---

## Risks to Valuation

1. **Model Risk**: DCF highly sensitive to WACC and terminal growth assumptions
2. **Execution Risk**: Projected growth may not materialize
3. **Market Risk**: Multiple compression in downturn
4. **[Company-Specific Risk]**: [Detail]

---

## Disclaimer

This valuation model is for educational and informational purposes only. It does not constitute investment advice. The intrinsic value estimate is based on assumptions that may not reflect reality.

Example

User Request

Build a DCF model for a SaaS company with:
- Current revenue: $500M
- Revenue growth: 25% declining to 15% over 5 years
- EBITDA margin: 20% improving to 30%
- Current stock price: $45
- Shares outstanding: 100M

My Response

[Complete DCF model with all calculations...]

Tips for Better Results

Provide historical data for more accurate projections
Be explicit about growth assumptions rather than using defaults
Specify the industry for appropriate comparables
Request sensitivity analysis to understand valuation range
Cross-check with multiples (P/E, EV/EBITDA) for sanity check

Limitations

Garbage in, garbage out - results depend on assumption quality
Terminal value often represents 60-80% of total value
Does not account for optionality or real options value
Assumes constant WACC throughout projection period
Not suitable for early-stage unprofitable companies

Built by the Claude Office Skills community. Contributions welcome!

dcf-valuation

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