DCF valuation |

**Around the formula...**

This method is a way to determine the enterprise value, which is the sum of the present value of after-tax cash flows over the explicit forecast period and the terminal value at the end of the explicit forecast period.

**1. Free cash flows calculation **

EBIT

- Normalised tax on operating income

+ Depreciation and amortisation

- Capital expenditure

- Change in working capital

= Free cash flow after-tax

The normalised cash flow must be consistent with the assumptions of the business plan :

- The Perpetual growth rate cannot be significantly greater than the long-term growth rate of the economy as a whole,

- The EBITDA margin should be normalised e.g. reflect the return the company will continue to generate to infinity,

- After tax ROCE should not be far from the weighted average cost of capital.

**2. Determination of the present value of the free cash flows
over the explicit forecast period (from i=1 to i=N)**

where F_{i} are the cash flows generated by the security, k is the applied discounting rate (weighted average cost of capital)
and N is the number of years for which the security is discounted.

**3. Determination of the present value of the terminal value at the end of the explicit forecast period
(i=N)
**

where k is the applied discounting rate (wacc) and g the perpetual growth rate, and under the condition that k > g.

**4. Enterprise value**