This module is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 9 of 9 · 15 min
From forecast statements to equity value: FCFF, terminal value and scenarios
A forecast model is turned into a value in six steps: forecast the income statement and balance sheet, derive FCFF, add a terminal value that fits the company's stage, discount, subtract debt, and repeat across probability-weighted scenarios.
In short
- Process: gather historical statements → forecast the income statement → forecast the balance sheet → compute FCFF/FCFE → estimate a terminal value → compute the present value. Steps 2 and 3 carry the narrative.
- For a stable company, use constant growth: with = reinvestment rate × return on capital = .
- Convert the terminal value into a firm-value multiple (EV/revenue, EV/EBITDA, EV/EBIT) to check its reasonableness against peers or history.
- Equity value = PV of FCFF + PV of terminal value − market value of debt.
- Build scenarios and weight them by subjective probabilities; a negative computed equity value is floored at about zero.
- Growth companies with negative FCF can only be valued by a disaggregated PV model, with a terminal value from a multiple of final-year sales or earnings.
Unlock this lesson free for 7 days
Create a free account to get 7 days of full access — every lesson, video, flashcard, mock and the question bank. No card needed.