A DCF estimate can fall even when the cash-flow forecast improves. A higher discount rate, weaker long-term assumptions, or a less favorable equity bridge can outweigh the improvement. The useful next step is to compare the old and new inputs and change one assumption at a time.
Try this prediction before looking at the results: if starting free cash flow rises by 10%, while WACC rises from 9% to 10%, will estimated value per share rise or fall?
There is no universal answer. The fictional example below shows how to find the answer for one model.
Start with the same fictional company
We reuse the hypothetical company in Stock Metric Lab’s DCF valuation guide so you can follow the example in the existing free calculator. These figures are educational assumptions, not reported company data.
FCFF means free cash flow to the firm. WACC means weighted average cost of capital.
Use USD millions for monetary amounts and millions for the share count. Cash flows are discounted from each year-end:
- Current annual FCFF: 92.592592
- Annual FCFF growth: 8%
- Forecast period: 5 years
- WACC: 9%
- Terminal growth: 2.5%
- Excess cash and non-operating assets: 250
- Debt and debt-like claims: 425
- Diluted shares: 100
The 425 combines 400 of debt and 25 of non-controlling interests from the guide. Do not subtract that 25 again.
Why the unusual starting cash flow? The calculator grows current FCFF once to reach year one. Starting with 92.592592 produces approximately 100 in year one at 8% growth. Entering 100 as current FCFF would produce 108 in year one and would describe a different case.
Use the free DCF Calculator: Open the DCF Calculator with these example inputs
Separate the two changes
First, reproduce the previous case. Its estimated value is approximately $16.70 per share.
Next, raise only current FCFF by 10%, to 101.8518512 million. Keep every other input unchanged. Estimated value rises to $18.54.
Finally, keep the higher FCFF and change only WACC from 9% to 10%. Estimated value falls to $15.77, below the original $16.70.
The comparison is:
- Previous assumptions: FCFF 92.592592 million, WACC 9%, value $16.70
- Cash-flow change only: FCFF 101.8518512 million, WACC 9%, value $18.54
- Cash-flow and WACC changes: FCFF 101.8518512 million, WACC 10%, value $15.77
Using unrounded calculations, the cash-flow revision adds approximately $1.84 per share. The subsequent WACC revision subtracts approximately $2.77. The combined change is approximately negative $0.93 per share. Independently rounded displayed values can differ by one cent when subtracted.
This is a sequential explanation: the size attributed to each change depends on which input you change first. The final combined valuation does not depend on that sequence.
Why the higher discount rate wins here
WACC is the discount rate applied to cash available to the firm’s capital providers. Raising it reduces the present value of the forecast cash flows. It also changes the terminal-value calculation.
In this example, terminal value uses final-year FCFF multiplied by 1.025, divided by WACC minus 2.5%. Moving WACC from 9% to 10% increases that denominator from 6.5% to 7.5%. The resulting terminal value is then discounted back five years at the higher rate.
In the original case, discounted terminal value represents approximately 75.6% of enterprise value. That helps explain why a one-percentage-point WACC change can outweigh the cash-flow improvement.
The FCFF-only case also raises enterprise value by exactly 10%, because the entire forecast scales with starting FCFF. Equity value increases by a different percentage because cash and debt-like claims remain fixed. Keep enterprise value and per-share equity value separate when interpreting the change.
Check what actually improved
For a real company, a stronger reported cash-flow number does not automatically justify increasing the normalized FCFF used in a DCF. Ask whether the improvement reflects recurring operations, a temporary working-capital release, or delayed investment. Record the period, definition, and source before changing the model.
Likewise, a WACC revision needs a documented reason. This exercise assumes a higher rate to demonstrate sensitivity; it does not claim that any company’s financing conditions have changed.
Check cash, debt-like claims, and diluted shares too. An acquisition, borrowing, or dilution can change the value attributable to each share even when operating cash flow improves. Keep units and valuation dates consistent across both versions.
Keep the previous assumptions available
After running the three cases, write down your original prediction and the input that reversed it. Save enough detail to reproduce each result rather than keeping only the final dollar figure.
For repeated reviews, the optional DCF Comparison Workbook provides a place to compare previous and current Bear, Base, and Bull assumptions and record the reasons for changes. It uses manual inputs and a manually maintained previous snapshot. Its model has a fixed five-year forecast and requires positive starting FCFF; it does not build FCFF or estimate WACC for you.
Review the workbook’s examples, model limits, and tested software before choosing it: View the DCF Comparison Workbook
Start with the free calculator, isolate the changes, and keep the assumptions behind the answer. An improved cash-flow forecast is one part of the valuation. Comparing the complete input set explains why the estimate moved.
For the full valuation process, see the DCF valuation guide: Read the DCF valuation guide
Educational information only. This fictional exercise is not an investment recommendation or a prediction of a future share price. Model precision does not remove uncertainty about the assumptions.