Discounted Cash Flow (DCF) Explained: A Complete Guide to the Layout, Formula, and Valuation Process

Discounted Cash Flow (DCF) Calculation Layout

Revenue ………………………………………….. XXX

Less: Cost of Goods Sold (COGS) ………. (XX)

= Gross Profit ……………………………….. XXX

Less: Operating Expenses (SG&A, R&D, etc.) … (XX)

= EBIT (Operating Income) ………………… XXX

Less: Taxes ………………………………………… (XX)

= NOPAT (Net Operating Profit After Tax) …. XXX

Add: Depreciation & Amortization ……….. +XX

Less: Capital Expenditures (CapEx) ………. (XX)

Less: Increase in Net Working Capital ……. (XX)

= Free Cash Flow (FCF) ………………………. XXX

For Each Forecast Year (t = 1 … n)

Free Cash Flow (Year t) ………………….. XXX

Discount Factor = 1 / (1 + WACC)^t

= Present Value of FCF (Year t) …………. XXX

Terminal Value (TV)

FCF in Final Year (n) …………………………. XXX

Multiply by (1 + g) → FCF (n+1) …………… XXX

Terminal Value = FCF(n+1) / (WACC – g)

Discount Factor = 1 / (1 + WACC)^n

= Present Value of Terminal Value ………. XXX

Enterprise Value (EV)

Sum of PV(FCFs 1→n) …………………………. XXX

+ PV(Terminal Value) …………………………… XXX

= Enterprise Value (EV) ……………………. XXX

Equity Value

Enterprise Value …………………………………. XXX

Less: Net Debt (Debt – Cash) ……………. (XX)

= Equity Value ……………………………….. XXX

Per Share Value

Equity Value ……………………………………….. XXX

÷ Shares Outstanding ……………………….. XX

= Value per Share …………………………… XXX

📌 Basic Accounting Formula for COGS

COGS = Beginning Inventory + Purchases (or Production Costs) − Ending Inventory

Where:
• Beginning Inventory = value of inventory at the start of the period
• Purchases/Production Costs = cost of producing or buying goods during the period (raw materials, direct labor, manufacturing overhead)
• Ending Inventory = value of unsold inventory at the end of the period

📌 Expanded Formula

COGS=Direct Materials+Direct Labor+Manufacturing Overhead+Freight-In−Purchase Returns & Allowances−Ending Inventory

📌 Example

• Beginning Inventory = 50,000
• Purchases = 120,000
• Ending Inventory = 40,000

COGS = 50,000 + 120,000 − 40,000 = 130,000

Operating Expenses

📌 Main Components of OPEX

Selling Expenses
• Marketing & Advertising
• Sales Team Salaries & Commissions
• Distribution & Logistics (not included in COGS)
General & Administrative (G&A) Expenses
• Office Rent & Utilities
• Insurance
• Legal & Professional Fees
• Administrative Salaries
Research & Development (R&D)
• Product Development
• Technology Investments
• Innovation Costs

📌 Formula for Operating Expenses

Operating Expenses = Selling Expenses + General & Administrative Expenses + Research & Development

Of course. Here is the information reorganized using proper LaTeX codes for clear, professional presentation, suitable for a financial document or reference guide.

Increase in Net Working Capital ($\Delta$NWC)

Definition

An Increase in Net Working Capital signifies that a company has invested more cash into its short-term operating assets (e.g., accounts receivable, inventory) than it has generated from its operating liabilities (e.g., accounts payable, accrued expenses). In a Discounted Cash Flow (DCF) analysis, this investment is treated as a cash outflow and is therefore subtracted from NOPAT to calculate Free Cash Flow (FCF).

Formula

The change in Net Working Capital from one period to the next is calculated as:

\Delta \mathrm{NWC} = \mathrm{NWC}_t - \mathrm{NWC}_{t-1}

Where Net Working Capital (NWC) itself is defined as:

\text{NWC} = \text{Operating Current Assets} - \text{Operating Current Liabilities}

Operating Current Assets = Accounts Receivable + Inventory + Other Current Assets (excludes Cash and Cash Equivalents)
Operating Current Liabilities = Accounts Payable + Accrued Expenses + Other Current Liabilities (excludes Short-Term Debt and the Current Portion of Long-Term Debt)

Impact on Free Cash Flow (FCF)

The sign of $\Delta$NWC directly determines its impact on cash flow:

If $\Delta \text{NWC} > 0$ → Increase in NWC → Cash Outflow → Decreases FCF
If $\Delta \text{NWC} < 0$ → Decrease in NWC → Cash Inflow → Increases FCF

Numerical Example

Consider the following figures from a company’s balance sheet:

Net Working Capital in Year 1: $\text{NWC}_{t-1} = \$200$
Net Working Capital in Year 2: $\text{NWC}_t = \$250$

The change in Net Working Capital is calculated as:

\Delta \text{NWC} = \$250 - \$200 = +\$50

This positive $\Delta$NWC of \$50 represents a use of cash and would be subtracted when calculating Free Cash Flow for Year 2.