Case 017DCF and intrinsic valueCore
A DCF case with blanks: fill in three years of statement lines for a components maker, forecast five years of free cash flow and derive a value.
1The situation
Sarthav Components makes precision castings for pump and valve makers. Revenue over the last three years was Rs 500, 560 and 620 crore. The case sheet gives the ratios and leaves the lines blank: EBITDA margin a steady 15%, depreciation 4% of revenue, capex 6% of revenue, net working capital 20% of revenue, tax 25%.
You are asked to fill in the historical lines, forecast five years at 10% revenue growth on the same ratios, and value the business at an 11% WACC with 5% growth after year five.
2Your task
Fill in the blanks, build unlevered free cash flow, and give an enterprise value. Which line do candidates most often get wrong?
Quick check
In the first forecast year, revenue grows Rs 62 crore. How much cash does working capital absorb?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Enterprise value is about Rs 683 crore. Each forecast year turns 15% EBITDA into free cash flow of about 4.4% of revenue, Rs 30.2 crore in year 1 rising to Rs 44.3 crore. Five years discount to Rs 134 crore and the terminal value, built on a year-6 cash flow that reinvests for 5% growth rather than 10%, adds Rs 549 crore. The change in working capital is the line most often missed or mis-signed.
Step 1How do you fill in the blanks without getting lost?
Fill one row at a time across all three years, in the order cash flows: revenue, EBITDA, depreciation, operating profit, tax, then capex and working capital. Every blank is a ratio times revenue, except the change in working capital, which is this year's balance less last year's. That one line is where the case is designed to catch you. Think of a shop that must keep a fifth of a year's sales as stock and credit: when sales grow, the shop's money is tied up before any profit reaches the owner.
| Rs crore | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| Revenue | 500.0 | 560.0 | 620.0 |
| EBITDA, 15% | 75.0 | 84.0 | 93.0 |
| Depreciation, 4% | 20.0 | 22.4 | 24.8 |
| Operating profit | 55.0 | 61.6 | 68.2 |
| Tax, 25% | 13.8 | 15.4 | 17.1 |
| NOPAT | 41.2 | 46.2 | 51.2 |
| Capex, 6% | 30.0 | 33.6 | 37.2 |
| Net working capital, 20% | 100.0 | 112.0 | 124.0 |
| Increase in working capital | n/a | 12.0 | 12.0 |
| Unlevered free cash flow | n/a | 23.0 | 26.8 |
Step 2What does a forecast year look like, and where does the cash go?
Revenue grows to Rs 682 crore, so EBITDA is Rs 102.3 crore. Tax is 25% of operating profit after depreciation, Rs 18.75 crore. Then growth takes its share twice: capex runs Rs 13.6 crore above depreciation, and working capital absorbs another Rs 12.4 crore. Free cash flow is Rs 30.2 crore, under a third of EBITDA. That ratio holds every forecast year: free cash flow is about 4.4% of revenue while the business grows at 10%.
| Forecast year | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|
| Revenue | 682.0 | 750.2 | 825.2 | 907.7 | 998.5 |
| NOPAT | 56.3 | 61.9 | 68.1 | 74.9 | 82.4 |
| Plus depreciation | 27.3 | 30.0 | 33.0 | 36.3 | 39.9 |
| Less capex | (40.9) | (45.0) | (49.5) | (54.5) | (59.9) |
| Less increase in working capital | (12.4) | (13.6) | (15.0) | (16.5) | (18.2) |
| Free cash flow | 30.2 | 33.2 | 36.6 | 40.2 | 44.3 |
| Discount factor at 11% | 0.901 | 0.812 | 0.731 | 0.659 | 0.593 |
| Present value | 27.2 | 27.0 | 26.7 | 26.5 | 26.3 |
Step 3How do you set the terminal value without overstating it?
Build a sixth year instead of growing the fifth. When growth slows from 10% to 5%, the business needs less new working capital and less capex above depreciation, so its free cash flow jumps. Year-6 revenue of Rs 1048.4 crore gives free cash flow of Rs 55.5 crore, not the Rs 46.5 crore you get by growing year 5 at 5%. The Gordon growthA terminal value formula: next year cash flow divided by the discount rate less the long-run growth rate. value is Rs 55.5 crore over 6%, Rs 926 crore, worth Rs 549 crore today. Enterprise value is Rs 134 crore plus Rs 549 crore, about Rs 683 crore.
| FCF_t | unlevered free cash flow in forecast year t |
| FCF_6 | year-6 cash flow rebuilt at 5% growth, Rs 55.5 crore |
| 0.11 - 0.05 | WACC less long-run growth |
Say the limitation: the terminal value is 80% of the answer, so the 5% growth and 11% WACC matter far more than any forecast line. Growing year 5 at 5% instead of rebuilding year 6 gives Rs 593 crore, about 13% lower, from one modelling choice.
Where candidates lose it
The common error is putting the level of net working capital into free cash flow instead of its change, which subtracts Rs 136 crore instead of Rs 12 crore and turns the cash flow negative. Close behind is adding working capital growth back as if it were a source of cash.
The second miss is growing the last forecast year's cash flow at 5% for the terminal value, which keeps 10%-growth reinvestment forever and understates value by about 13%.
What the interviewer asks next
- How does the value change if working capital falls to 15% of revenue?
- What exit multiple of EBITDA does the terminal value imply?
- Why would you use mid-year discounting, and roughly how much does it add?
- Where would the balance sheet blanks be checked against the cash flow statement?
Asked at Harris Williams, Mergers and Acquisitions, Richmond, 2026 (Wall Street Oasis): Fill in the blanks with excel for balance sheet, income statement, and scf across 3 years, then forecast fcf and derive a value
Company names and figures are illustrative.