Valuation: DCF, Terminal Value and Multiple Consistency
Valuation
The two families are intrinsic (DCF) and relative (trading comparables, precedent transactions). A DCF discounts unlevered free cash flow at WACC to an enterprise value, adds a terminal value, then bridges to equity value: EV minus net debt minus preferred and minority interest plus associates equals equity value; divide by diluted shares (treasury stock method for options) to get value per share.
Terminal value dominates - typically 60-80% of DCF value. Use either Gordon growth (FCF x (1+g) / (WACC - g), with g below long-run nominal growth and strictly less than WACC) or an exit multiple. Do not double count growth: with an exit multiple, the terminal year must be a normalized steady state where capex roughly equals D&A.
The most examined trap is multiple consistency. Enterprise-value multiples (EV/EBITDA, EV/EBIT, EV/Sales) pair with enterprise-level metrics; equity multiples (P/E, P/B) pair with equity-level metrics. Dividing EV by net income is a category error. Also remember EBITDA is pre-capex and pre-working-capital, so comparing firms with very different capital intensity on EV/EBITDA misleads.
Worked example: EV of 1,000, debt of 300, cash of 50 and 100 diluted shares gives equity value of 1,000 - 300 + 50 = 750, or 7.50 per share. If peers trade at 7x EV/EBITDA on EBITDA of 120, implied EV is 840 - a 16% premium to the DCF that must be explained, not averaged away.