Here is a simplistic five-step approach to doing a DCF for a company. Step 1 forecast the free cash flows up until the steady state period that's normally for the first five or ten years. Let's assume it's 10 years in our example. Step 2 calculate the weighted average cost of capital the WACC. Work is the discount rate that will be applied to the future free cash flows. So we've got all of these cash flows in the future and we're going to ask our financiers our debt holders and shareholders, what kind of returns are they looking for? We then work out a weighted average of these returns. Let's say that's 10% In many instances, you will not be required to calculate whack and you will be given a value for WACC by a more senior member of your team.

Step 3 calculate the terminal value Now, what is this terminal value? Remember that in the first step. We only forecast cash flows for a finite number of years in our example 10 years. At that stage you might have thought hang on the company. I'm trying to value is not just going to exist for the next 10 years. What about the cash flows it's going to generate after that point. That represented by the terminal value. We need to calculate this terminal value and it will represent all of these cash flows into perpetuity. Step 4. Discount the cash flows to today. We need to discount all of the future cash flows. So that would be the individual cash flows in years 1 to 10 as well as the terminal value to today using the WACC. We then add these all together and that gives us the Enterprise Value or EV. Step 5. We can then use the EV to equity bridge to calculate the equity value. If we know the number of shares outstanding we can also determine an implied share price by dividing the equity value by the number of shares.