How Do You Value a Company Calculator

Company Valuation Calculator (DCF Method)

Use this calculator to estimate a company's intrinsic value per share using the Discounted Cash Flow (DCF) method. This method projects a company's future free cash flows and discounts them back to their present value.

function calculateCompanyValuation() { var currentFreeCashFlow = parseFloat(document.getElementById('currentFreeCashFlow').value); var fcfGrowthRate = parseFloat(document.getElementById('fcfGrowthRate').value) / 100; var growthYears = parseInt(document.getElementById('growthYears').value); var terminalGrowthRate = parseFloat(document.getElementById('terminalGrowthRate').value) / 100; var discountRate = parseFloat(document.getElementById('discountRate').value) / 100; var cashEquivalents = parseFloat(document.getElementById('cashEquivalents').value); var totalDebt = parseFloat(document.getElementById('totalDebt').value); var sharesOutstanding = parseFloat(document.getElementById('sharesOutstanding').value); // Input validation if (isNaN(currentFreeCashFlow) || isNaN(fcfGrowthRate) || isNaN(growthYears) || isNaN(terminalGrowthRate) || isNaN(discountRate) || isNaN(cashEquivalents) || isNaN(totalDebt) || isNaN(sharesOutstanding) || currentFreeCashFlow < 0 || fcfGrowthRate < 0 || growthYears < 1 || terminalGrowthRate < 0 || discountRate <= 0 || cashEquivalents < 0 || totalDebt < 0 || sharesOutstanding <= 0) { document.getElementById('enterpriseValueResult').innerText = 'Please enter valid positive numbers for all fields.'; document.getElementById('equityValueResult').innerText = ''; document.getElementById('valuePerShareResult').innerText = ''; return; } if (discountRate <= terminalGrowthRate) { document.getElementById('enterpriseValueResult').innerText = 'Discount Rate must be greater than Terminal Growth Rate for a valid Terminal Value calculation.'; document.getElementById('equityValueResult').innerText = ''; document.getElementById('valuePerShareResult').innerText = ''; return; } var totalPresentValueFCF = 0; var projectedFCF = currentFreeCashFlow; // Calculate present value of FCF for high-growth years for (var i = 1; i <= growthYears; i++) { projectedFCF *= (1 + fcfGrowthRate); var discountFactor = Math.pow((1 + discountRate), i); totalPresentValueFCF += (projectedFCF / discountFactor); } // Calculate Terminal Value var fcfNextYearAfterGrowth = projectedFCF * (1 + terminalGrowthRate); var terminalValue = fcfNextYearAfterGrowth / (discountRate – terminalGrowthRate); // Discount Terminal Value back to present var discountFactorTerminal = Math.pow((1 + discountRate), growthYears); var presentValueTerminalValue = terminalValue / discountFactorTerminal; // Calculate Enterprise Value var enterpriseValue = totalPresentValueFCF + presentValueTerminalValue; // Calculate Equity Value var equityValue = enterpriseValue + cashEquivalents – totalDebt; // Calculate Value Per Share var valuePerShare = equityValue / sharesOutstanding; document.getElementById('enterpriseValueResult').innerText = '$' + enterpriseValue.toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }); document.getElementById('equityValueResult').innerText = '$' + equityValue.toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }); document.getElementById('valuePerShareResult').innerText = '$' + valuePerShare.toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }); } .company-valuation-calculator { font-family: 'Arial', sans-serif; background-color: #f9f9f9; padding: 20px; border-radius: 8px; box-shadow: 0 2px 4px rgba(0, 0, 0, 0.1); max-width: 700px; margin: 20px auto; border: 1px solid #ddd; } .company-valuation-calculator h2 { color: #333; text-align: center; margin-bottom: 20px; } .company-valuation-calculator p { color: #555; line-height: 1.6; margin-bottom: 15px; } .calculator-inputs label { display: block; margin-bottom: 5px; color: #333; font-weight: bold; } .calculator-inputs input[type="number"] { width: calc(100% – 22px); padding: 10px; margin-bottom: 15px; border: 1px solid #ccc; border-radius: 4px; box-sizing: border-box; } .calculator-inputs button { background-color: #007bff; color: white; padding: 12px 20px; border: none; border-radius: 4px; cursor: pointer; font-size: 16px; width: 100%; box-sizing: border-box; transition: background-color 0.3s ease; } .calculator-inputs button:hover { background-color: #0056b3; } .calculator-results { background-color: #e9ecef; padding: 15px; border-radius: 4px; margin-top: 20px; border: 1px solid #dee2e6; } .calculator-results h3 { color: #333; margin-top: 0; border-bottom: 1px solid #ccc; padding-bottom: 10px; margin-bottom: 15px; } .calculator-results p { font-size: 1.1em; margin-bottom: 10px; color: #333; } .calculator-results span { font-weight: bold; color: #007bff; }

Understanding Company Valuation: The Discounted Cash Flow (DCF) Method

Company valuation is the process of determining the economic value of a business. It's a critical exercise for investors, business owners, and financial analysts alike, providing insights into a company's true worth. Whether you're looking to buy or sell a business, make investment decisions, or assess financial performance, a robust valuation is essential.

Why Value a Company?

• Investment Decisions: Investors use valuation to determine if a company's stock is undervalued or overvalued, guiding their buy, hold, or sell decisions.
• Mergers & Acquisitions (M&A): Valuation helps set fair prices for companies being acquired or merged.
• Capital Raising: Businesses seeking funding need a valuation to determine the equity stake offered to investors.
• Strategic Planning: Understanding a company's value can inform strategic decisions, such as divestitures or expansion plans.
• Financial Reporting: For accounting purposes, especially for private companies or specific assets.

The Discounted Cash Flow (DCF) Method Explained

The Discounted Cash Flow (DCF) method is one of the most widely used and theoretically sound valuation techniques. It's based on the principle that a company's value is derived from the sum of its future cash flows, discounted back to their present value. In essence, a dollar today is worth more than a dollar tomorrow due to inflation and the opportunity cost of capital.

Key Components of the DCF Model:

1. Free Cash Flow (FCF): This is the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. It represents the cash available to all capital providers (debt and equity holders). The calculator starts with the Current Annual Free Cash Flow.
2. FCF Growth Rate: This is the projected annual rate at which the company's free cash flow is expected to grow during a specified high-growth period (e.g., the next 5-10 years). Our calculator uses an Annual FCF Growth Rate for the initial Number of High-Growth Years.
3. Terminal Growth Rate: After the high-growth period, it's assumed that the company's growth will stabilize and continue at a constant, sustainable rate into perpetuity. This Perpetual Growth Rate is typically a low, stable rate, often tied to the long-term inflation rate or GDP growth.
4. Discount Rate (WACC): The discount rate represents the rate of return required by investors to compensate them for the risk of investing in the company. For a company, this is often its Weighted Average Cost of Capital (WACC), which considers the cost of both equity and debt. A higher discount rate implies higher risk and results in a lower present value.
5. Cash & Equivalents: This is the amount of readily available cash and highly liquid assets a company holds on its balance sheet. It adds directly to the equity value.
6. Total Debt: This represents all short-term and long-term financial obligations of the company. Debt reduces the equity value as it must be repaid.
7. Number of Shares Outstanding: The total number of a company's shares currently held by all its shareholders. This is used to calculate the value per share.

How the Calculator Works (DCF Steps):

1. Project Free Cash Flows: The calculator first projects the Free Cash Flow for each year of the high-growth period, applying the specified FCF Growth Rate.
2. Discount Projected FCFs: Each projected FCF is then discounted back to its present value using the Discount Rate (WACC).
3. Calculate Terminal Value: At the end of the high-growth period, a Terminal Value is calculated. This represents the value of all cash flows beyond the explicit forecast period, assuming a constant Perpetual Growth Rate. The formula for Terminal Value is typically: FCF (Year N+1) / (Discount Rate - Terminal Growth Rate).
4. Discount Terminal Value: The Terminal Value is also discounted back to its present value.
5. Sum Present Values (Enterprise Value): The sum of all discounted projected FCFs and the discounted Terminal Value gives you the company's Enterprise Value. This is the total value of the company, including both debt and equity.
6. Calculate Equity Value: To arrive at the Equity Value (the value attributable to shareholders), Cash & Equivalents are added to the Enterprise Value, and Total Debt is subtracted.
7. Calculate Value Per Share: Finally, the Equity Value is divided by the Number of Shares Outstanding to determine the intrinsic value per share.

Example Scenario:

Let's consider a hypothetical company with the following inputs:

• Current Annual Free Cash Flow: $10,000,000
• Annual FCF Growth Rate: 10%
• Number of High-Growth Years: 5
• Perpetual Growth Rate: 3%
• Discount Rate / WACC: 12%
• Cash & Equivalents: $5,000,000
• Total Debt: $20,000,000
• Number of Shares Outstanding: 1,000,000

Using these inputs, the calculator would perform the steps outlined above to arrive at an estimated Enterprise Value, Equity Value, and Value Per Share. For instance, the projected FCFs would grow year over year, then be discounted. A Terminal Value would be calculated based on the FCF in year 6 and discounted back. All these present values would sum up to the Enterprise Value, from which Equity Value and Value Per Share are derived.

Limitations of DCF:

While powerful, the DCF method is highly sensitive to its input assumptions. Small changes in growth rates, the discount rate, or the terminal growth rate can lead to significant variations in the final valuation. It requires careful forecasting and a deep understanding of the business and its industry. Therefore, DCF is often used in conjunction with other valuation methods (like comparable company analysis or precedent transactions) to provide a more comprehensive view of a company's worth.