Corporate Finance

Equity Valuation — DCF, DDM & WACC

Estimate a stock's intrinsic value two ways — by discounting free cash flow (DCF) and by the Gordon / two-stage dividend-discount model (DDM) — and derive the discount rate (WACC) and CAPM cost of equity behind them. See the year-by-year discounted cash flows, how much of the value is terminal, and a growth-vs-discount sensitivity heatmap.

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Enter FCF₀ in the same unit (e.g. $ millions) as shares — value per share comes out correctly either way.

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For a plain Gordon model, set high-growth years to 0 and use g₂ as the single perpetual growth rate. The required return r is shared with WACC below if you fill the CAPM box.

Discount rate — WACC & CAPM
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How it works

Every valuation here rests on one idea: a security is worth the present value of the cash it will hand its owners. The models differ only in which cash flow they discount and at what rate.

Cost of capital

The discount rate compensates investors for time and risk. We estimate the cost of equity with the Capital Asset Pricing Model:

re = rf + β · ERP
The risk-free rate plus beta (the stock's sensitivity to the market) times the equity risk premium.

Blending that with the after-tax cost of debt, weighted by the market values of equity (E) and debt (D), gives the weighted average cost of capital used to discount firm-level free cash flow:

WACC = (E / (E+D)) · re + (D / (E+D)) · rd · (1 − tax)
Interest is tax-deductible, so debt is taken after tax. Equity is more expensive because shareholders are paid last.

Dividend-discount model (DDM)

If a company pays a stable, growing dividend, the simplest valuation is the Gordon growth model, a growing perpetuity:

P₀ = D₀(1 + g) / (r − g)   requires r > g.

When near-term growth is faster than the sustainable long-run rate, the two-stage model discounts each high-growth dividend explicitly, then adds a Gordon terminal value at the end of the high-growth phase:

P₀ = Σ D₀(1+g₁)t / (1+r)t for t = 1…n, plus [ Dn(1+g₂)/(r−g₂) ] / (1+r)n.

Discounted free cash flow (DCF)

For non-dividend payers we discount free cash flow to the firm at WACC, grow it through the forecast, then add a terminal value and discount everything to today:

EV = Σ FCFt / (1+WACC)t plus [ FCFn(1+g₂)/(WACC−g₂) ] / (1+WACC)n.

That enterprise value, less net debt, divided by shares outstanding, gives the intrinsic value per share. Because so much value sits in the terminal piece, the tool reports the terminal-value share and a sensitivity grid — if a small change in g₂ or the discount rate swings the answer wildly, treat the point estimate with caution.

FAQ

Which value should I trust — DCF or DDM? Use the model that matches how the company returns cash. A mature dividend payer fits the DDM; a reinvesting growth firm fits the DCF. When both are reasonable, treat the range between them as your valuation band, not a single number.
Why does it say "undefined" or refuse to compute? A growing perpetuity only converges when the discount rate exceeds the terminal growth rate (r > g₂ for DDM, WACC > g₂ for DCF). If growth meets or beats the discount rate, the math diverges — lower the terminal growth or raise the discount rate.
Is this investment advice? No. Intrinsic value is only as good as your assumptions, which are uncertain. This is an educational model for CFA-style equity valuation, not a recommendation to buy or sell.

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