DCF calculation is a popular tool for estimating the fair value of a company. GuruFocus DCF calculator is one of the most favorite tools of our users on GuruFocus. The details of the DCF calculation can be found here.
We have made the following changes to DCF calculator lately to reflect a more conservative approach of DCF calculation. Thanks to all users who have give feedback on the calculator.
1. Tangible book is not added to the fair value calculation. We have had quite a debate on this. Now the tangible book is not added to the results.
2. Terminal value calculation is limited to a certain number of years:
In our previous calculation of terminal value, the model assumes that the company will grow at the terminal growth rate forever. While the contribution from each of the far future years is small, they do add up. In this modification, we have set a default of 10 to the number of years that the company will grow at the terminal growth rate. After the terminal growth years the contribution will be cut to 0.
If a user is more optimistic with the company, they can adjust the years of the terminal growth.
With these modifications, the DCF fair value is given by this:
Growth value=E(0) x(1-x^n)/(1-x), where x=(1+g)/(1+d), n is the number of years business will grow at the rate of g; d is the discount rate. E(0) is the earnings of the company in the current year.
Terminal value=E(0) x^n * y(1-y^m)/(1-y), where y=(1+t)/(1+d), where m is the years of terminal growth; t is the terminal growth rate.