WACC to Terminal Value and Intrinsic Value Assessment

Executive Summary

The Discounted Cash Flow (DCF) method is the most theoretically sound methodology for evaluating a company's intrinsic value, calculating enterprise value by converting future cash flows into present value. With global private equity LBO deal volume reaching$150.3 billionin the first half of 2025 alone, already at 70% of the previous year's total, the importance of DCF-based precision valuation is becoming increasingly prominent.¹

This content approaches the core components of DCF valuation—estimating Free Cash Flow,calculating WACC, anddetermining Terminal Value—from a practical perspective. It proposes a framework example to enhance the accuracy of investment decisions through scenario-based hypothesis testing. Unfortunately, due to limitations in disclosing all information, we will selectively present illustrative examples.

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1. Theoretical Basis of DCF Valuation

1.1) Core Principles of DCF

DCF is an approach that adheres strictly to the fundamental principle of financial theory: "The value of a company is the sum of the present values of its future cash flows." It is recognized as the most fundamental valuation method because it calculates intrinsic value based on the company's inherent cash-generating ability, without relying on market sentiment or comparable company multiples.

• DCF Basic Formula$$DCF=\sum _{t=1}^n\frac{FC{F}_t}{(1+r{)}^t}+\frac{TV}{(1+r{)}^n}$$DCF=t=1∑n(1+r)tFCFt+(1+r)nTV

• $n$Estimated Period
• $FC{F}_t$Free Cash Flow (FCF)
• r: Discount Rate
• TV: Terminal Value

1.2) Why DCF?

Evaluation Method	Advantages	Limits	Suitable situations
DCF	Intrinsic value assessment, reflecting growth potential	High household sensitivity	Growth companies, M&A, IPO
Comparable	Easy to calculate, market-reflective	Subjectivity in Selecting Comparable Companies	Quick Valuation
Asset-based	Objective asset value	Limitations of Intangible Asset Valuation	Liquidation value, asset-intensive

For S Company's investment organization, preliminary evaluations are conducted internally, utilizing DCF analysis during this process.
It is primarily used in Series C to D funding rounds, IPO preparations, and M&A negotiations for companies with predictable revenue structures, such as SaaS, fintech, and healthtech firms.

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2. Free Cash Flow (FCF) Estimate

2.1) Free Cash Flow to the Firm (FCFF) vs Free Cash Flow to Equity (FCFE)

Free Cash Flow to Firm (FCFF) is the cash flow attributable to all corporate stakeholders (shareholders + creditors), while Free Cash Flow to Equity (FCFE) is the cash flow attributable solely to shareholders.

Category	FCFF	Free Cash Flow to Equity
Justice	Cash distributable to all capital providers after operating activities	Cash distributable to shareholders after debt repayment
Mountain formula	EBIT(1-t) + Depreciation & Amortization – Capital Expenditures – Change in Net Working Capital	FCFF – Interest expense (1-t) + Net debt
Discount rate	WACC	Cost of Equity
Applicable	Enterprise Value Calculation	Direct Calculation of Equity Value

FCFF Calculation Formula$$FCFF=EBIT\times (1-t)+D\mathrm{\&}A-CapEx-\mathrm{\Delta }NWC$$

2.2) Estimation Framework: Five-Year Forecast

[Example: SaaS Tech Startup A]

Item	Y1	Y2	Y3	Y4	Y5
Sales Revenue (KRW billion)	500	650	845	1,014	1,166
Sales Growth Rate	30%	30%	30%	20%	15%
EBIT Margin	8%	10%	12%	14%	15%
EBIT	40	65	101	142	175
EBIT after tax	32	52	81	113	140
D&A	25	33	42	51	58
Capital Expenditures	(50)	(65)	(85)	(81)	(70)
ΔNWC	(15)	(20)	(26)	(22)	(19)
FCFF	(8)	0	12	61	109

• Key Assumptions
  • Sales Growth Rate: 2026 AI Startup Average Growth Rate 30–50% Reference:
  • EBIT Margin: Profitability improvement through scale-up (8%→15%)
  • CapEx Intensity: Gradual decrease from 10% to 6% of sales

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3. Calculation of WACC (Weighted Average Cost of Capital)

3.1) WACC Formula

$$WACC=\frac{E}{V}\times r_e+\frac{D}{V}\times r_d\times (1-t)$$

• $E\mathrm{/}V$E/VEquity ratio
• $D\mathrm{/}V$D/V: Proportion of Third-Party Capital
• $r_e$reCost of Equity
• $r_d$rdCost of Debt
• $t$tCorporate tax rate

3.2) Calculating the Cost of Equity: CAPM

$$r_e=r_f+\beta \times (r_m-r_f)+\alpha$$

Input values at the time of review

Variable	Price	Basis
Risk-free interest rate$r_f$rf)	3.8%	10-year Korean government bond yield
Market Risk Premium$r_m – r_f$rm -rf)	5.5%	Historical Average ERP
Beta$\beta$β)	1.2	Industry Average Beta (Tech Sector)
Size Premium($\alpha$α)	2.0%	Additional risk for small and mid-cap stocks
Cost of Equity	12.4%	3.8% + 1.2 × 5.5% + 2.0%

3.3) Example of WACC Calculation

Category	specific gravity	Cost	Post-tax adjustment
Equity (E)	70%	12.4%	8.68%
Debt Capital (D)	30%	5.0%	1.05% (after tax)
WACC	–	–	9.73%

[Tip] Recent research indicates that when applying DCF analysis to Indonesian retail company AMRT (
), using a WACC of 11.27%, Cost of Equity of 12.11%, and a terminal growth rate of 5.50% resulted in an Enterprise Value of 114.87 trillion rupiah.²

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4. Terminal Value Calculation

4.1) Two Approaches

Method	Official	Suitable situations
Permanent Growth Model	$TV = \frac{FCF_{n+1}}{WACC – g}$TV = WACC − gFCFn+1	Sustainable Growth Company
Exit Multiple	$TV = EBITDA_n × Exit Multiple$TV = EBITDA × Exit Multiple	M&A Exit Forecast

[Example: SaaS Tech Startup A]

• Terminal Value Application of the Permanent Growth Model
  $$TV=\frac{FC{F}_5\times (1+g)}{WACC-g}=\frac{109\times 1.025}{0.0973-0.025}=\frac{111.7}{0.0723}=1,545\text{billion won}$$

• Terminal Value Apply Multiple Exits
  $$TV=EBITD{A}_5\times ExitMultiple=233\text{billion won}\times 8.0x=1,864\text{billion won}$$

4.2) Cross-validation of the two methods

Method	Terminal Value	Present Value (5-year discount)	Enterprise Value
Permanent Growth Model	154.5 billion won	97 billion won	108.4 billion won
Exit Multiple	186.4 billion won	117 billion won	128.5 billion won
Average	–	107 billion won	118.5 billion won

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5. Scenario Analysis: 3P Framework

5.1) Hypothesis Verification Matrix

Valuation analysis applies the Possibility,Plausibility,and Probabilityframework to validate the reliability of DCF assumptions. (Refer to Professor Damodaran's materials)³)

Initial verification items	possibility	Feasibility	plausibility	Overall Evaluation
Sales growth rate 30% → 15%	✅ Possible	✅ Valid	🔶 Midpoint	Fluctuates according to market maturity
EBIT Margin 15%	✅ Possible	✅ Valid	✅ High	Conservative relative to the industry average
WACC 9.73%	✅ Possible	✅ Valid	✅ High	Reflecting the current interest rate environment
Permanent growth rate of 2.5%	✅ Possible	✅ Valid	✅ High	Long-term GDP growth rate level

5.2) Sensitivity Analysis

Example: Enterprise Value Changes for SaaS Tech Startup A Based on WACC vs. Permanent Growth Rate (Unit: KRW billion)

WACC↓ / g→	1.5%	2.0%	2.5%	3.0%	3.5%
8.5%	1,170	1,256	1,357	1,476	1,619
9.0%	1,075	1,148	1,233	1,332	1,449
9.73%	957	1,016	1,084	1,161	1,251
10.5%	855	903	956	1,017	1,087
11.0%	798	840	886	939	999

• Key Insights
  • A 100-basis-point change in WACC causes an8–10%fluctuation in enterprise value.
  • A 50-basis-point change in the permanent growth rate causes a±5–7%fluctuation in enterprise value.

In the above case, risk flag: TV overweight case

The fact that Terminal Value accounts for 87–93% of Enterprise Value raises serious doubts about the reliability of DCF analysis. When handling investment strategy for Company O or Company S, a common practice is to re-examine the robustness of assumptions if the TV weight exceeds 60-70%.
That is, a re-examination is conducted regarding the aforementioned "Initial Verification Items (Possibility, Plausibility, Probability)."

As a recommended countermeasurein responseto this,

1. Adjustment of Profitability Improvement Timeline: Consider extending the timeline for achieving a 15% EBIT margin
2. Extended Forecast Period: Expanded from 5 years to 7–10 years, reducing TV's share
3. Parallel Use of Multiple Exit Methods: Strengthening Cross-Validation Compared to the Permanent Growth Model
4. Growth Rate Assumption Review: Examining the Realistic Feasibility of the 30%→20%→15% Growth Rate Pattern for Y1 to Y5

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6. Limitations and Complementary Approaches to DCF

6.1) The Fundamental Limitations of DCF

Multiples (such as PER and EV/EBITDA) face criticism for having a weak theoretical foundation and being essentially products of market practice and convenience. However, DCF also has the following limitations.

• Sensitivity of Assumptions: Small changes in key assumptions such as discount rates, growth rates, and margins significantly impact results.
• Limitations for early-stage companies: Not suitable for pre-revenue companies where cash flow forecasting is difficult
• Market Discrepancy: Potential for a Long-Term Gap Between Intrinsic Value and Market Price

6.2) Complementary Framework: Numbers + Narratives

Professor Aswath Damodaran of NYU Stern points out, "A narrative without numbers is merely storytelling, and numbers without a narrative are merely modeling." To enhance the completeness of DCF analysis,

• 5-Step Narrative to Numbers Process
  1. Business Narrative Development: Defining Your Company's Growth Story
  2. Narrative Test: Verification of Consistency with Market Reality
  3. Value Driver Linkage: Converting Narratives into Financial Variables
  4. Valuation Execution: DCF Model Development and Analysis
  5. Feedback Loop: Performance-Based Verification and Narrative Adjustment

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Conclusion

DCF valuation is the most theoretically robust methodology for assessing a company's intrinsic value. However, its advantage of making all assumptions explicit simultaneously demands a high level of responsibility regarding the accuracy of those assumptions.
As of 2026, in an overheated market environment where AI startups command Revenue Multiples of10x to 50x, it remains to be seen whether DCF will serve asan anchor,unaffected by market sentiment.

For a better DCF analysis,

1. Establish a solid business narrativefirst,
2. Converting thisinto verifiable numbers
3. Test assumptions through various scenarios
4. Cross-validation with market datamust be performed.

Numbers alone are merely modeling,and stories alone are merely storytelling.⁴)

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Endnotes

1. https://soferadvisors.com/insights/blog/what-are-the-discounted-cash-flow-techniques-a-guide/
   https://www.spglobal.com/market-intelligence/en/news-insights/articles/2025/9/large-deals-push-leveraged-buyout-total-higher-private-equity-entry-value-grows-92394291 ↩︎
2. https://serambi.org/index.php/jemr/article/view/1036 ↩︎
3. https://aswathdamodaran.blogspot.com/2014/07/possible-plausible-and-probable-big.html
   https://www.youtube.com/channel/UCLvnJL8htRR1T9cbSccaoVw ↩︎
4. https://aswathdamodaran.blogspot.com/2014/06/numbers-and-narrative-modeling-story.html ↩︎