biz-dcf（商业贴现现金流）

Discounted Cash Flow (DCF) Valuation

Overview

DCF estimates a company's intrinsic value by projecting future free cash flows and discounting them to present value using WACC. It answers "what is this business worth based on its future cash generation ability?"

When to Use

Trigger conditions:

• User needs to value a company or business unit
• User evaluating M&A targets or investment opportunities
• User asks "what's the fair price?" or "build a valuation model"

When NOT to use:

• For early-stage startups with no revenue → use comparables or venture method
• For quick relative valuation → use multiples (P/E, EV/EBITDA)
• For portfolio-level decisions → use BCG Matrix

Framework

IRON LAW: Garbage In, Garbage Out

DCF output is ONLY as good as its assumptions. Every assumption (growth rate,
margin, WACC, terminal growth) must be explicitly stated with justification.
A DCF without an assumptions table is worthless.

IRON LAW: Terminal Value Dominates — Handle with Care

Terminal value typically represents 60-80% of total DCF value. If your
terminal growth rate exceeds long-term GDP growth (~2-3%), you're implying
the company will eventually become larger than the economy. Cap terminal
growth at the risk-free rate or GDP growth.

Step 1: Project Free Cash Flows (5-10 years)

FCF = EBIT × (1 - Tax Rate) + Depreciation - CapEx - ΔWorking Capital

Build projections from:

• Revenue growth assumptions (top-down or bottom-up)
• Operating margin trajectory
• Capital expenditure requirements
• Working capital changes

Step 2: Calculate WACC

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

Where:

• Re = Cost of equity (use CAPM: Rf + β × Market Risk Premium)
• Rd = Cost of debt (interest rate on borrowings)
• E/V = Equity weight, D/V = Debt weight

Step 3: Calculate Terminal Value

Gordon Growth Model (preferred):

TV = FCF_final × (1 + g) / (WACC - g)

Where g = terminal growth rate (cap at 2-3%)

Exit Multiple Method (alternative):

TV = EBITDA_final × EV/EBITDA multiple

Step 4: Discount to Present Value

Enterprise Value = Σ FCFt / (1 + WACC)^t + TV / (1 + WACC)^n
Equity Value = Enterprise Value - Net Debt
Per Share Value = Equity Value / Shares Outstanding

Step 5: Sensitivity Analysis

Test key assumptions: WACC (±1%), terminal growth (±0.5%), revenue growth (±2%). Present as a sensitivity table.

Output Format

# DCF Valuation: {Company}

## Key Assumptions
| Assumption | Value | Justification |
|-----------|-------|---------------|
| Revenue growth (Y1-5) | X% | {basis} |
| Operating margin (terminal) | X% | {basis} |
| WACC | X% | {calculation} |
| Terminal growth | X% | {basis} |

## Projected Free Cash Flows
| Year | Revenue | EBIT | FCF |
|------|---------|------|-----|
| Y1 | ... | ... | ... |

## Valuation Summary
- PV of FCFs: $X
- PV of Terminal Value: $X (X% of total)
- Enterprise Value: $X
- Less: Net Debt: $X
- Equity Value: $X
- Per Share: $X

## Sensitivity Table
| WACC \ Terminal g | 1.5% | 2.0% | 2.5% |
|-------------------|------|------|------|
| 8% | $X | $X | $X |
| 9% | $X | $X | $X |
| 10% | $X | $X | $X |

Examples

Correct Application

Scenario: DCF for a Taiwanese SaaS company (ARR NT$500M, growing 25%)

• Projected 5 years of FCF with declining growth (25% → 15%)
• WACC 10.5% (justified: Rf 1.5%, β 1.2, ERP 6%, debt cost 4%)
• Terminal growth 2.5% (Taiwan GDP growth proxy)
• TV = 72% of enterprise value — within normal range ✓
• Sensitivity table shows $X range across ±1% WACC

Incorrect Application

• Terminal growth rate of 8% → Implies the company outgrows the economy forever. Violates Iron Law.
• No assumptions table — just "Enterprise Value = NT$2.5B" → No way to validate. Violates Iron Law.

Gotchas

• Terminal value sensitivity: Small changes in terminal growth or WACC swing valuation 20-30%. Always present a range, not a point estimate.
• Circular reference in WACC: WACC needs equity value (market cap), but DCF calculates equity value. Iterate or use target capital structure.
• FCF vs Net Income: DCF uses Free Cash Flow, not earnings. Companies with high capex or working capital needs can have positive earnings but negative FCF.
• Country risk premium: For Taiwan/emerging market companies, add a country risk premium to WACC (typically 1-3%).
• Negative FCF in early years: Growth companies may have negative FCF initially. This is fine — the value comes from later years and terminal value.

Scripts

Run python scripts/dcf.py --verify to execute built-in sanity tests.

References

• For WACC calculation details, see references/wacc-calculation.md
• For comparable company multiples approach, see references/comparables.md