Step Four: Calculating Present Value and Determining DCF Valuation
The next step in the DCF valuation process is to use the discount rate to determine what the actual value of the target company will be in terms of the value of a current dollar. To do so, we must find the discounted value for each year of the five-year projection period and that of the terminal value and then add those numbers together. That formula is:
With our numbers from this example, that equation looks like: [51.3 / (1.10)1] + [55.8 / (1.10)2] + [60.7 / (1.10)3] + [63.6 / (1.10)4] + [65.5 / (1.10)5] + [963.8 / (1.10)5] (or, 46.12 + 46.64 + 45.60 + 43.44 + 40.67 + 598.44) = 820.91. Thus, according to our final DCF valuation, Bunyan’s Cut has an enterprise value of $820.9 million.
Example Question
Your customer, Axma
