DEEP RESEARCH · DCF VALUATION
Example of Analyzing Current Market Price with Discounted Future Cash Flow
A DCF note estimating how many years of sustained excess profit are embedded in the current enterprise value
0. Bottom line first
In this example, EV is 2,441 hundred million won. At a 9% cost of capital, cumulative discounted FCFF is 2,385.64 hundred million won in year 8, still below EV, and 2,696.01 hundred million won in year 9, above EV. The current market price can therefore be read as reflecting a scenario where these assumptions hold until roughly between year 8 and year 9.
I will calculate this using a domestic company as an example. The cost of capital is entered arbitrarily, but it is actually an important variable. If the return on reinvestment is below the cost of capital, the company may be better off returning all cash to shareholders rather than reinvesting. Profit growth equal to the cost of capital does not increase corporate value.
1. Updated Basic Information
| Item | Amount/rate | Calculation |
|---|---|---|
| Current assets | 1,500 hundred million won | - |
| Non-current assets | 1,400 hundred million won | - |
| Total assets | 2,900 hundred million won | 1,500 + 1,400 |
| Total liabilities | 300 hundred million won | - |
| Current financial assets | 1,040 hundred million won | Cash and cash equivalents |
| Net debt | -740 hundred million won | 300 - 1,040 |
| Market capitalization | 3,181 hundred million won | - |
| Enterprise value (EV) | 2,441 hundred million won | 3,181 + (-740) |
| Cost of capital (WACC) | 9% | Assumed |
2. Assumptions and Settings
- Initial revenue: 1,800 hundred million won
- Revenue growth: 10% per year
- Operating margin: 20%
- Tax rate: 6% (changed assumption)
- Reinvestment rate: 7%
3. Free Cash Flow to Firm Calculation
Using a 6% tax rate, I calculate NOPAT and FCFF for each year.
| Year | Revenue (hundred million won) | Operating profit | NOPAT | Reinvestment | FCFF |
|---|---|---|---|---|---|
| 1 | 1,800 | 360 | 338.4 | 23.688 | 314.712 |
| 2 | 1,980 | 396 | 372.24 | 26.0568 | 346.1832 |
| 3 | 2,178 | 435.6 | 409.464 | 28.66248 | 380.80152 |
| 4 | 2,395.8 | 479.16 | 450.4224 | 31.529568 | 418.892832 |
| 5 | 2,635.38 | 527.076 | 495.45144 | 34.6816008 | 460.7698392 |
| 6 | 2,898.918 | 579.7836 | 545.996584 | 38.21976088 | 507.77682312 |
| 7 | 3,188.8098 | 637.76196 | 599.4962424 | 41.96473697 | 557.5315054 |
| 8 | 3,507.6908 | 701.53816 | 659.4468704 | 46.16128093 | 613.2855895 |
| 9 | 3,858.4599 | 771.69198 | 725.3894628 | 50.7772624 | 674.6122004 |
| 10 | 4,244.3059 | 848.86118 | 797.9287096 | 55.85400967 | 742.0746999 |
- NOPAT calculation: operating profit × (1 - tax rate)
- Reinvestment calculation: NOPAT × reinvestment rate
- FCFF calculation: NOPAT - reinvestment
4. Discounted FCFF Calculation
Using a 9% cost of capital, I discount each year's FCFF to present value.
| Year | Discount factor |
|---|---|
| 1 | 0.91743 |
| 2 | 0.84168 |
| 3 | 0.77218 |
| 4 | 0.70843 |
| 5 | 0.64993 |
| 6 | 0.59627 |
| 7 | 0.54703 |
| 8 | 0.50187 |
| 9 | 0.46017 |
| 10 | 0.42241 |
| Year | FCFF (hundred million won) | Discount factor | Discounted FCFF | Cumulative discounted FCFF |
|---|---|---|---|---|
| 1 | 314.712 | 0.91743 | 288.61 | 288.61 |
| 2 | 346.1832 | 0.84168 | 291.39 | 580.00 |
| 3 | 380.80152 | 0.77218 | 294.05 | 874.05 |
| 4 | 418.892832 | 0.70843 | 296.81 | 1,170.86 |
| 5 | 460.7698392 | 0.64993 | 299.44 | 1,470.30 |
| 6 | 507.7768231 | 0.59627 | 302.78 | 1,773.08 |
| 7 | 557.5315054 | 0.54703 | 304.86 | 2,077.94 |
| 8 | 613.2855895 | 0.50187 | 307.70 | 2,385.64 |
| 9 | 674.6122004 | 0.46017 | 310.37 | 2,696.01 |
| 10 | 742.0746999 | 0.42241 | 313.68 | 3,009.70 |
5. Estimating the Forecast Period
Official fact: Enterprise value (EV) is 2,441 hundred million won. When looking for the point where cumulative discounted FCFF exceeds EV, year 8 cumulative discounted FCFF of 2,385.64 hundred million won is still below EV, while year 9 cumulative discounted FCFF of 2,696.01 hundred million won exceeds EV.
Interpretation: Therefore, the forecast period sits between year 8 and year 9. Here, the forecast period means the period during which the assumptions above continue to hold. In general, once a company begins earning excess profit, competitors emerge; after returns converge toward the cost of capital, corporate value no longer increases.
A company with a moat can keep this forecast period longer. This is the number that can be read as the valuation component.
6. Reference
Related reference post: https://m.blog.naver.com/star_of_self/223635317544