Full DCF from Scratch

Step 1: Revenue Build

Plugging in the Year 0 revenue of $500.0m and the growth schedule from Step 1 of the given data:

Revenue is the anchor of the whole model — every other line, from EBITDA down to the terminal value, is built as a percentage of or a growth path from this schedule, so an error here cascades through every later step.

Step 2: EBITDA, D&A, and EBIT

EBITDA = Revenue × 22.0% (0.22); D&A = Revenue × 4.0% (0.04); EBIT = EBITDA - D&A.

EBIT measures profitability from the core operations alone, before financing decisions (interest) or taxes enter the picture. Because it excludes capital structure effects, it is exactly the profit line a DCF needs — the model derives its own capital structure through WACC, so starting from an already-levered profit figure like Net Income would double-count financing.

Step 3: Unlevered Free Cash Flow

Unlevered FCF = EBIT × (1 - Tax Rate) + D&A - CapEx - Increase in Net Working Capital.

Where: Tax Rate = 25.0% (0.25), CapEx = 5.0% of Revenue, Increase in NWC = 2.0% of the year-over-year Revenue increase.

Unlevered FCF strips out financing entirely — no interest expense, no debt paydown — so it represents the cash the business generates for all capital providers, debt and equity alike. That is precisely the cash flow stream WACC is built to discount.

Step 4: Weighted Average Cost of Capital (WACC)

WACC = (E/(D+E) × Re) + (D/(D+E) × Rd × (1 - Tax Rate)).

Where: Re = Cost of Equity, Rd = Pre-Tax Cost of Debt, E/(D+E) = Target Equity Weight, D/(D+E) = Target Debt Weight.

Plugging in an equity weight of 60.0%, cost of equity of 11.0%, debt weight of 40.0%, pre-tax cost of debt of 5.0%, and a 25.0% tax rate:

WACC = (0.60 × 11.0%) + (0.40 × 5.0% × (1 - 0.25)) = 6.6% + 1.5% = 8.1%

WACC blends the return equity investors require with the after-tax cost of debt, weighted by how the company is actually financed. It is the single discount rate that converts every future dollar of Unlevered FCF into today's dollars — get it wrong by even half a point and the valuation shifts materially, since it also compounds through the terminal value.

Step 5: Terminal Value

Terminal Value = FCF (Year 5) × (1 + g) / (WACC - g).

Plugging in the Year 5 Unlevered FCF of $87.8m, a terminal growth rate of 2.5%, and a WACC of 8.1%:

Terminal Value = $87.8m × 1.025 / (0.081 - 0.025) = $90.0m / 0.056 = $1,606.3m

Terminal Value captures every cash flow beyond the five-year forecast, collapsed into a single Year-5 value using the Gordon Growth (perpetuity) formula. It routinely accounts for 70-80% or more of total Enterprise Value in a DCF, which is exactly why the terminal growth rate assumption deserves as much scrutiny as any single forecast-year input.

Step 6: Present Value of Cash Flows and Enterprise Value

PV = Cash Flow (Year t) / (1 + WACC)^t, discounted at WACC = 8.1%.

Sum of PV(Unlevered FCF, Year 1-5) = $308.3m. Enterprise Value = $308.3m + $1,088.3m (PV of Terminal Value) = $1,396.6m.

Enterprise Value represents the value of the entire operating business, independent of how it is financed — it is what an acquirer would pay for the whole company's operations before considering its debt and cash balances.

Step 7: Equity Value and Value Per Share

Equity Value = Enterprise Value - Net Debt; Value Per Share = Equity Value / Shares Outstanding.

Plugging in the Enterprise Value of $1,396.6m, Net Debt of $300.0m, and 100.0m shares outstanding:

Equity Value = $1,396.6m - $300.0m = $1,096.6m

Value Per Share = $1,096.6m / 100.0m = $10.97

This is the equity bridge: Enterprise Value belongs to both debt and equity holders, so subtracting Net Debt isolates the portion that belongs to shareholders alone, which is then divided across the share count to get a price you can compare directly to where the stock actually trades.

Final Results

• WACC: 8.1%
• Enterprise Value: $1,396.6m
• Equity Value: $1,096.6m
• Value Per Share: $10.97

This full build is exactly what sits behind every "what's this company worth" question in an interview — comparable companies and precedent transactions exist to cross-check this same equity value from a different angle, and a good candidate can explain why the three methods might disagree.

Would you like to explore how sensitive this valuation is to the terminal growth rate and WACC assumptions?