Perform institutional-quality DCF valuations following Professor Aswath Damodaran's methodology from NYU Stern.
Reference Files
Before running analysis, consult these reference files based on company type:
- references/industry_data.md — Sector betas, WACC ranges, equity risk premiums by country
- references/dcf_formulas.md — All core formulas (FCFF, WACC, terminal value, CAPM)
- references/valuation_examples.md — Worked examples across company types:
- Mature stable (P&G)
- High-growth tech (Palantir)
- Hypergrowth (CrowdStrike)
- Highly cyclical (Freeport-McMoRan)
- Turnaround (Intel)
- Dividend aristocrat (J&J)
Execution Workflow
Step 1: Classify Company Type
First, determine the company's profile to select appropriate assumptions:
| Type | Characteristics | WACC Range | Terminal Growth |
|---|---|---|---|
| Mature Stable | Low beta (<0.8), consistent FCF, dividend payer | 6-8% | 2-2.5% |
| Moderate Growth | Beta 0.8-1.2, 10-20% revenue growth | 8-11% | 2.5-3% |
| High Growth | Beta 1.2-1.6, 20-40% revenue growth | 11-14% | 3-3.5% |
| Hypergrowth | Beta >1.5, >40% revenue growth | 14-18% | 3.5-4% |
| Highly Cyclical | Commodity/industrial, volatile earnings | 12-15% | 2-3% |
| Turnaround | Negative/declining FCF, restructuring | 8-12% | 0-3% |
Step 2: Gather Financial Data
Use web search to collect current data:
Search queries:
[TICKER] revenue operating income 2024 2025[TICKER] free cash flow TTM[TICKER] market cap shares outstanding[TICKER] beta WACC cost of capital[TICKER] debt cash balance sheet
Required metrics:
- Current stock price and market cap
- Shares outstanding
- TTM revenue and FCF
- Total debt and cash
- Beta (5-year monthly)
- Historical growth rates
Step 3: Calculate WACC
Cost of Equity = Risk-Free Rate + (Beta × 5.5%)
WACC = (E/V × Cost of Equity) + (D/V × After-Tax Cost of Debt)
Use 10-year Treasury (~4.3%) as risk-free rate.
Step 4: Project Free Cash Flows
Growth rate decay by company type:
| Type | Yr 1 | Yr 2 | Yr 3 | Yr 4 | Yr 5 |
|---|---|---|---|---|---|
| Hypergrowth | 40% | 32% | 25% | 18% | 12% |
| High growth | 25% | 20% | 16% | 12% | 8% |
| Moderate | 15% | 13% | 11% | 9% | 6% |
| Mature | 6% | 5% | 4% | 3% | 2.5% |
For cyclical companies: Normalize FCF to mid-cycle before projecting.
For turnarounds: Use scenario analysis (bull/bear cases with probabilities).
Step 5: Calculate Intrinsic Value
Terminal Value = FCF(Year 6) / (WACC - Terminal Growth)
Enterprise Value = PV(Stage 1) + PV(Terminal Value)
Equity Value = EV + Cash - Debt
Share Price = Equity Value / Shares Outstanding
Step 6: Sensitivity Analysis
Create matrix varying WACC (±2%) and terminal growth (±1%):
| WACC \ Terminal | 2% | 3% | 4% |
|---|---|---|---|
| 10% | $XX | $XX | $XX |
| 12% | $XX | $XX | $XX |
| 14% | $XX | $XX | $XX |
Step 7: Investment Recommendation
| Premium/Discount | Rating | Action |
|---|---|---|
| >50% premium | OVERVALUED | AVOID |
| 20-50% premium | FAIRLY VALUED (HIGH) | HOLD |
| -20% to +20% | FAIRLY VALUED | HOLD |
| -20% to -40% discount | UNDERVALUED | BUY |
| >40% discount | DEEPLY UNDERVALUED | STRONG BUY |
Output Format
## [COMPANY] ([TICKER]) - DCF Valuation
### Executive Summary
- **Current Price:** $XX
- **Intrinsic Value:** $XX
- **Valuation Gap:** XX% [premium/discount]
- **Company Type:** [Mature/Growth/Cyclical/etc.]
- **Recommendation:** [STRONG BUY / BUY / HOLD / SELL / AVOID]
### Key Metrics
[Table with market cap, revenue, FCF, WACC, etc.]
### DCF Model
[5-year FCF projections + terminal value]
### Sensitivity Analysis
[WACC vs terminal growth matrix]
### Investment Thesis
[Bull case, bear case, key assumptions]
### Risk Factors
[Company-specific risks]
### Bottom Line
[Clear, actionable recommendation in one paragraph]
Critical Rules by Company Type
Mature companies: Terminal value will be 75-85% of total value — be conservative on terminal growth.
Growth companies: Challenge aggressive assumptions — even great businesses can be overpriced.
Cyclical companies: ALWAYS normalize FCF to mid-cycle. Never use peak or trough earnings.
Turnarounds: Use probability-weighted scenario analysis, not single-point DCF.
High-beta stocks: The discount rate is your friend — 16%+ WACC makes most growth stories look expensive.
Disclaimers (Always Include)
- DCF is highly sensitive to assumptions
- This is not professional financial advice
- Past performance doesn't guarantee future results
- Consult qualified advisors before investing
