Reverse DCF Calculator Description
The Reverse Discounted Cash Flow (DCF) Calculator is a tool designed to help you determine the implied growth rates that justify the current stock price. This calculator provides two models:
- Single-Stage (Gordon Growth) Model: This model assumes the company's Free Cash Flow per Share (FCFE) will grow at a single, constant rate (g) forever, starting next year. The current stock price is the present value of all future FCFE, discounted back by the Cost of Equity (Ke).
- Two-Stage Growth Model: This model assumes two distinct growth phases: a period of higher growth (g₁) for a specific number of years (N), followed by a period of stable, lower perpetual growth (g₂) forever.
Single-Stage (Gordon Growth) Model
Model Logic:
This model assumes the company's Free Cash Flow per Share (FCFE) will grow at a single, constant rate (g) forever, starting next year.
The current stock price is assumed to be the present value of all future FCFE, discounted back by the Cost of Equity (Ke).
Formula: Price = FCFE₁ / (Ke - g) where FCFE₁ = FCFE₀ * (1 + g).
This calculator rearranges the formula to solve for the implied perpetual growth rate (g) that justifies the current stock price:
g = (Price * Ke - FCFE₀) / (Price + FCFE₀)
Assumptions: Constant growth forever, stable business model, Ke > g.
Two-Stage Growth Model
Model Logic:
This model is more realistic for many companies, assuming two distinct growth phases:
- Stage 1: A period of higher, potentially variable (but here assumed constant) growth (g₁) for a specific number of years (N).
- Stage 2: A period of stable, lower perpetual growth (g₂) forever after Stage 1.
The current stock price is the sum of:
- The present value of FCFE during Stage 1 (growing at g₁).
- The present value of the Terminal Value (calculated at the end of Stage 1, representing the value of all FCFE from Stage 2 onwards, growing at g₂).
Formula components:
- PV(Stage 1 FCFE) = Σ [ (FCFE₀ * (1 + g₁)^t) / (1 + Ke)^t ] for t=1 to N
- Terminal Value (TV) at Year N = [ FCFE₀ *(1 + g₁)^N_ (1 + g₂) ] / (Ke - g₂)
- PV(Terminal Value) = TV / (1 + Ke)^N
- Price = PV(Stage 1 FCFE) + PV(Terminal Value)
This calculator uses a numerical search (binary search) to find the implied Stage 1 growth rate (g₁) that makes the calculated DCF value equal to the current stock price, given the user-provided inputs (N, g₂, Ke, FCFE₀).
Assumptions: Distinct high-growth and stable phases, Ke > g₂, accuracy depends on input quality.
To use the calculator:
- Choose the model (Single-Stage or Two-Stage).
- Enter the required inputs based on the selected model.
- Click the "Calculate" button.
- The implied growth rate(s) that justify the current stock price will be displayed.
This tool is useful for investors and analysts who want to evaluate the growth assumptions implicit in the current stock price.