Use this checklist to make the assumptions in a discounted cash flow model explicit and auditable. It is educational material, not personalized investment advice.
1. Define the valuation date and unit
- Record the valuation date.
- Use one currency and one scale consistently.
- Record the diluted share-count date.
- Link reported figures to primary-source filings or investor documents.
2. Normalize starting free cash flow
- Begin with cash flow from operations and subtract capital expenditures consistently.
- Separate recurring operations from acquisitions and financing.
- Review restructuring, litigation, tax, working-capital, and other unusual cash effects.
- Compare the latest year with a three-to-five-year history before choosing normalized FCFF.
3. Set explicit forecast assumptions
- State revenue or FCFF growth by stage.
- State operating-margin, cash-tax, and reinvestment assumptions.
- Choose a forecast length and a defensible fade toward mature growth.
- Define bear, base, and bull cases whose differences are economically explained.
4. Choose the discount rate
- State whether the model uses FCFF/WACC or equity cash flow/cost of equity.
- Check the risk-free rate, equity risk premium, business risk, borrowing cost, tax rate, and target capital structure.
- Keep WACC above terminal growth in a perpetual-growth model.
- Test a reasonable range instead of relying on one point estimate.
5. Calculate terminal value carefully
- Explain the terminal-growth assumption.
- Compare it with long-run nominal growth and mature reinvestment needs.
- Check the percentage of enterprise value coming from terminal value.
- Cross-check the implied terminal multiple against business quality and cyclicality.
6. Reconcile enterprise value to equity value
- Add excess cash and non-operating investments only once.
- Subtract debt and other debt-like claims where relevant.
- Treat minority interests and material leases consistently.
- Use diluted shares, including economically meaningful awards, warrants, and convertibles.
7. Stress-test and review
- Build a WACC/terminal-growth sensitivity table.
- Test lower margins, slower growth, greater reinvestment, and dilution.
- Compare the result with a reverse DCF using the current market price.
- Confirm that inputs are dated and sourced, facts are separated from estimates, and the model avoids false precision.
Put the checklist to work
Test your assumptions with Stock Metric Lab’s DCF Calculator and Reverse DCF Calculator. Always verify current figures independently.
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