Identify who owns the cash flow
First decide whether you value the whole business or owners’ equity. Cash flows to the firm before debt-financing payments and cash flows to shareholders after those obligations must not be mixed. NYU’s course stresses matching cash flow and discount rate.[16](#source-valuation-dcf)
Also align currency, nominal or real values and period length. If forecast prices and costs already include inflation, do not apply an inflation-free rate without explanation. Monthly flows require a correct time conversion when using an annual formula. Record initial-data sources separately from future assumptions. A spreadsheet does not turn revenue, margin or investment forecasts into facts. For simplicity, all flows here arrive at year-end.
A small numerical example
All amounts are fictional, in millions of roubles, and do not concern a current company. Firm cash flow is 10 million in year one, 12 million in year two and an expected 14 million in year three. The educational discount rate is 10%. The 14 million is a separate transition forecast of normalized year-three flow; steady growth of 3% begins after year three. The move from 12 to 14 is not 3% growth.
Present value of the first flow is 10 / 1.10 = 9.09 million. The second is 12 / 1.10² = 9.92 million. Terminal value at the end of year two is 14 / (0.10 − 0.03) = 200 million. The 14 is next year’s flow, not the already-counted 12.
After discounting, the terminal part is about 165.29 million. Total business value is about 184.30 million. With fictional net debt of 30 million, the simplified equity value is 154.30 million. A real calculation may require other adjustments; two lines do not prove that every asset and obligation is included.
Terminal value needs special checking
In this example, about 89.69% of business value comes from the terminal part. The result therefore depends mainly on long-term continuation, not on the two detailed forecast years. Many initial forecast rows can create an illusion of reliability when one future assumption contains most of the value.
The perpetual-growth formula requires the discount rate to exceed growth and both parameters to be consistent. When they are close, the result becomes extremely sensitive. If the condition fails, a negative or infinite result is not a normal valuation of a continuing business. Perpetual growth is not free: check investment needed to maintain operations.
Scenarios and sensitivity
Keeping the same flows and growth but increasing the rate to 12% gives a business value of about 142.50 million. This shows sensitivity of the specified model, not a forecast of market-price movement. Future flows may also change, but every scenario must remain internally consistent.
Check flow signs, discount exponents, terminal-value date and the absence of double-counted debt. State what evidence would make you revise the forecast. A range of scenarios and assumptions is more reasonable than a price precise to kopecks. The educational DCF model supports discussion of value drivers; it is not a personal instruction to buy or sell.