DCF calculator and formula

A two-stage DCF does not forecast forever by hand. It forecasts a stretch of explicit years, then assumes growth settles at a long-run rate and capitalises that as a perpetuity. The enterprise value is the present value of both pieces.

On the default, free cash flow is a flat $100,000 for 5 years and the discount rate is 10 percent. The explicit stage is $100000 \times (1/1.1 + 1/1.1^2 + \cdots + 1/1.1^5) = 379078.68$. The year-6 flow is $100000 \times 1.03 = 103000$. Gordon growth at 3 percent then gives a terminal value at the end of year 5 of $103000 / (0.10 - 0.03) = 1471428.57$. Discounted five years, that terminal piece is $913,641.38 in today's money. Add them: $1,292,720.05.

Most of the value sits in the terminal stage. That is normal for a stable growing perpetuity, and it is the reason a 3 percent terminal growth versus a 2 percent one moves the answer more than a tweak to year 1. The explicit years earn their keep by setting the level the perpetuity takes off from, not by being most of the value.

Gordon growth divides by $r - g$. If growth equals or exceeds the discount rate, the denominator is zero or negative and the perpetuity has no finite value: the firm would be growing faster than the return required on the capital that funds it, forever, which is not a number, it is a contradiction. The calculator refuses that case rather than printing a huge or negative enterprise value as if it were an answer.

A usable long-run $g$ is a growth rate the whole economy could bear, not a growth rate a firm posted in a good decade. The WACC calculator is the usual source for $r$. Mixing a real WACC with nominal cash flows, or the reverse, is the same Fisher error every other discounting page on this site warns about.

Raising WACC shrinks both stages, but it shrinks the terminal stage more, because that piece is a long-dated claim. That is duration, applied to a firm rather than a bond.

The default holds free cash flow flat so the two stages are easy to separate. A growing explicit stage changes the launchpad for Gordon growth. Starting at $80,000 and growing 8 percent a year for 5 years produces the series $80,000, $86,400, $93,312, $100,776.96, $108,839.12. At a 9 percent WACC and 2.50 percent terminal growth, enterprise value is $1,475,783.75.

Notice the explicit growth rate, 8 percent, is not the terminal rate, 2.50 percent. Two-stage DCF exists exactly so those can differ: a high-growth stretch, then a lower forever rate. Using the high-growth rate in Gordon growth is the usual way a DCF explodes, because 8 percent forever at a 9 percent WACC puts almost all the value in a perpetuity that is one point away from blowing up.

Enterprise value is the value of the operations, before subtracting net debt. Equity value is enterprise value minus net debt plus non-operating assets. This calculator stops at enterprise value, because net debt is a balance-sheet input the cash-flow forecast does not contain.

Free cash flow itself is after reinvestment, which is why a growth rate and a reinvestment rate are linked: you cannot grow at 8 percent forever on zero reinvestment. The page will not police that. It will discount the flows it is given. Garbage in, a precise-looking enterprise value out.

For a single-stage growing perpetuity with no explicit forecast, the dividend discount calculator is the Gordon formula on its own. For a finite cash-flow series with no terminal value, the NPV calculator is the right tool.