Lesson 10 of 11 · All lessons in this module
  1. Disaggregated models: why and how to build a forecast valuation model
  2. Forecasting revenue: top-down, bottom-up and non-recurring items
  3. Forecasting operating costs: COGS, SG&A and segment margins
  4. Expense models: regressions, itemized costs and margin assumptions
  5. Working capital, capital investments and capital structure
  6. Asset and financing models: investment, financing needs and FCFE
  7. Integrated cases: a regional revenue build and richer financing assumptions
  8. Scenario analysis: risk factors, cost structure and sensitivityVideo lesson
  9. Matching the model to the company: life cycle, distress and control
  10. From forecast statements to equity value: FCFF, terminal value and scenarios
  11. Integrated case: from assumptions to equity value, step by step

This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.

Lesson 10 of 11 · 15 min

From forecast statements to equity value: FCFF, terminal value and scenarios

A forecast model is turned into a value in six steps: forecast the income statement and balance sheet, derive FCFF, add a terminal value that fits the company's stage, discount, subtract debt, and repeat across probability-weighted scenarios.

In short

  • Process: gather historical statements → forecast the income statement → forecast the balance sheet → compute FCFF/FCFE → estimate a terminal value → compute the present value. Steps 2 and 3 carry the narrative.
  • For a stable company, use constant growth: TV=FCFFt+n(1+g)/(WACC−g)TV = FCFF_{t+n}(1 + g)/(WACC - g) with gg = reinvestment rate × return on capital = (1−FCFF/NOPAT)×NOPAT/Capitalt+n−1(1 - FCFF/NOPAT) \times NOPAT/\text{Capital}_{t+n-1}.
  • Convert the terminal value into a firm-value multiple (EV/revenue, EV/EBITDA, EV/EBIT) to check its reasonableness against peers or history.
  • Equity value = PV of FCFF + PV of terminal value − market value of debt.
  • Build scenarios and weight them by subjective probabilities; a negative computed equity value is floored at about zero.
  • Growth companies with negative FCF can only be valued by a disaggregated PV model, with a terminal value from a multiple of final-year sales or earnings.

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