A finished FIN-450 Topic 1 discounted cash flow firm valuation example, valuing a composite manufacturer, exposing a terminal value near three quarters of the total and judging a 32 offer against it. Searches like "fin 450 topic 1 assignment example", "fin450 topic 1 sample" and "fin-450 topic 1 example" land here.
What a finished FIN-450 Topic 1 discounted cash flow firm valuation looks like
All figures in the finished valuation are illustrative and in millions. Free cash flow to the firm runs 40, 44, 47, 50 and 52 over five years, discounted at a 9 percent weighted average cost of capital. A terminal value of 820, at 2.5 percent growth, brings enterprise value to about 712, and that terminal value supplies about 75 percent of it. The example then reads the terminal value as a multiple: about 8.6 times year-five EBITDA of 95, above the 7 to 8 times at which the case's peers trade. Peers at 7.5 times current EBITDA of 80 give 600. Subtracting 150 of net debt and dividing by 16 million shares gives about 35.14 a share from the forecast and 28.13 from multiples. At 2 percent growth the forecast falls to about 32.61, close to the offer.
How a FIN-450 Topic 1 example is structured
Forecast, terminal value, cross-check and decision are the four parts. The opening states the board's question, whether 32 a share undervalues the company, and marks every figure as illustrative. The forecast section builds free cash flow from operating profit after tax, adding back depreciation and subtracting capital spending and working capital growth, year by year. A discount rate paragraph takes the case's 9 percent and leaves its construction to the next topic. The terminal value section computes the growing perpetuity, states its share of the total and converts it into an implied exit multiple. It also checks that terminal-year reinvestment is large enough to support 2.5 percent growth forever. The multiples section applies peer ratios to current EBITDA. A sensitivity grid varies the discount rate from 8 to 10 percent and growth from 2 to 3 percent, and the decision section reads the offer against that grid.
Free cash flow built line by line
Operating profit after tax, plus depreciation, less capital spending and working capital growth, gives cash flow rising from 40 to 52 over the five forecast years.
Terminal value measured against the total
At 2.5 percent growth the terminal value discounts to about 533 of a 712 enterprise value, roughly three quarters of the answer resting on one assumption.
The perpetuity read as a multiple
Dividing the 820 terminal value by year-five EBITDA of 95 implies about 8.6 times, above every peer in the case, and the example flags the gap.
Growth checked against reinvestment
Perpetual growth of 2.5 percent requires reinvesting part of operating profit every year, so terminal-year cash flow is checked for enough capital spending to fund it.
A sensitivity grid around the offer
Across discount rates of 8 to 10 percent and growth of 2 to 3 percent, value per share runs from about 27 to 48, with the offer inside.
Where marks go in FIN-450 Topic 1
A terminal value accepted without comment is marked wrong on this topic, since here one assumption supplies three quarters of the value and half a point of growth moves the answer by more than 2.50 a share. Papers that discount free cash flow to equity at the weighted average cost of capital, or subtract net debt from a value that already excludes it, mix the claims of lenders and owners. Forecasts that grow without the capital spending growth requires produce cash flow no firm could deliver. Leaving out a multiples cross-check leaves the forecast unanchored to any market price. A single point estimate hides the range a board needs to see. Valuations that never return to the offer have computed a number and left the decision itself to someone else.
Get a FIN-450 Topic 1 example written to your instructions
Send the FIN-450 Topic 1 instructions and the rubric from your classroom, with the case your section assigns. We write a custom example to them, with free cash flow built by line, the terminal value measured and read as a multiple, a peer cross-check and a sensitivity grid tied to the decision, in 24 to 48 hours. The first one is free.
FIN-450 Topic 1 questions, answered
Why does the terminal value dominate a DCF?
Because a five-year forecast captures only the first few years of a business expected to run indefinitely, and everything after that is compressed into one figure. With a 9 percent discount rate and 2.5 percent growth, the years beyond the forecast account for about 75 percent of value in the example. That share is common rather than wrong, but it means the terminal assumptions deserve more scrutiny than any single forecast year.
What is an implied exit multiple?
The terminal value divided by a final-year earnings measure, usually EBITDA. It translates a perpetual growth assumption into the multiple a buyer would be paying at the end of the forecast. If that multiple sits well above what comparable firms trade at today, the growth rate or the discount rate is probably generous. The example computes about 8.6 times against a peer range of 7 to 8.
Can this valuation tell me what a real company is worth?
No. The company, its forecast, the discount rate and the peer multiples were invented for the case, set so that the terminal value's weight and the offer's position show clearly. Valuing a real firm depends on audited statements, a defensible forecast, market data from the valuation date and professional judgment. The example demonstrates the discounted cash flow work FIN-450 grades, as coursework that offers no investment advice.