Learnings · Valuation
DCF: FCFF and
the terminal value
The valuation question asked more than any other after the three statements. The method in a minute, then a DCF on a real Indian company with today’s bond yield in the discount rate and the assumptions left for you to move.
The question
Walk me through a DCF.
The answer in sixty seconds
Forecast the free cash flow the business produces for everyone who funds it, FCFF, for five to ten years, and discount it at the WACC. Beyond the forecast, add a terminal value: usually the last year’s cash flow grown at a steady rate for ever, FCFF × (1 + g) ÷ (WACC − g), discounted back too. The sum is enterprise value. Take off debt and minority interest, add back cash, and divide by the number of shares for a value per share to set against the price.
Two points matter most, and interviewers know it. The terminal value is often most of the answer. And the result moves a lot with the WACC and with g, so show a range, not a single number. Keep g below the economy’s long-run growth, and no higher than the risk-free rate.
EV = Σ FCFFₜ ÷ (1 + WACC)ᵗ for t = 1 … 5 + TV ÷ (1 + WACC)⁵ TV = FCFF₅ × (1 + g) ÷ (WACC − g) Equity value = EV − debt − minority interest + cash Value per share = equity value ÷ shares
Worked on live numbers
A DCF on today’s inputs
Start from the company’s last full year of FCFF, grow it for five years, add a terminal value, and discount it all at the WACC from the WACC page: today’s 10-year yield (7.47% (India 10-year yield, 23 Oct 2026, CCIL)), the company’s own beta, and your equity risk premium.
Value per share by WACC and terminal growth
Statements: consolidated, for the year to 31 Mar 2026, as Yahoo Finance carries them, in Rs crore. Prices and market caps: NSE closes of 23 Oct 2026 via Yahoo Finance. Balance-sheet figures are at the year end while the market cap is today's, the usual mismatch in any quick EV.
The growth rates are yours to set: they start at 8% and 5%, round numbers, not forecasts. Terminal growth stops at the risk-free rate, a common ceiling. FCFF is worked out as on the FCFF page; lease payments sit in financing under Ind AS, so leases are counted with debt in the bridge from EV to equity. This shows the method on real inputs. It is not a target price: one year’s cash flow and a single growth rate are the simplest DCF there is. When the value is far from the price, ask what the price assumes instead: the growth rate that gives today’s price, worked out above, is a reverse DCF, and interviewers like it.
Follow-ups
What they ask next
Why discount FCFF at the WACC and not the cost of equity?
FCFF is cash for lenders and shareholders together, so it takes their blended required return. Cash for shareholders alone, FCFE, is discounted at the cost of equity. Mixing them is the classic error.
Perpetuity growth or an exit multiple for the terminal value?
Growth ties the value to the business’s own cash flow; an exit multiple ties it to today’s market prices. Use one and check it with the other: a growth rate that implies an absurd multiple, or the reverse, means an assumption is off.
The terminal value is 75% of your answer. Is that a problem?
It is normal for a growing company, and it is why the terminal assumptions deserve the most care. Test it: a wider forecast period, a sensitivity table, and a cross-check against multiples.
How would a rise in the 10-year yield change your valuation?
It raises the risk-free rate, so the cost of equity and the WACC rise and the value falls. Companies whose value sits far in the future, fast growers, fall the most, which is why rate rises hit growth stocks hardest.
What makes a DCF wrong?
A WACC at or below g, which breaks the formula; growth higher than the economy for ever; using EBITDA as cash flow and forgetting capex and working capital; and taking off debt twice, once in FCFF and again in the bridge.
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