Case 013Screening and ranking businessesWarm up

Simple DCF for an invented coatings business: free cash flow of Rs 50 crore growing 8% for five years, 4% terminal growth, 12% discount rate. What is the enterprise value, and how much of it is terminal value?

HPS Investment PartnersNew York · 2025

The situation

Chitravarna Coatings makes industrial paints for auto component makers. Its free cash flow to the firm next year will be Rs 50 crore, and the plan grows it 8% a year for five years. After that, assume growth settles at 4% a year for good. The fund uses a 12% discount rate for businesses of this kind; treat that as given rather than derived.

You have two days and a laptop. The panel will ask what the number depends on.

Your task

Build the DCF, give the enterprise value, show what share comes from the terminal value, and say which assumptions move the answer most.

Quick check

Five years of explicit cash flow, then a terminal value. Roughly what share of the value will the terminal value be?

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 710 crore, and Rs 502 crore of it, 71%, is the terminal value. The five explicit years discount to Rs 208 crore. The terminal value of Rs 884 crore in year 5 is 13.0x year 5 cash flow, which is the number to sanity-check against what such businesses sell for. One point on terminal growth or on the discount rate moves the value by roughly Rs 77 to Rs 104 crore.

Step 1How do the five years add up?

Each year's cash is worth less today than its face value, the way a Rs 100 gift promised in five years is worth less than Rs 100 in hand, because you could have invested the Rs 100 meanwhile. Divide each year's free cash flow by 1.12 raised to the year: Rs 50 crore becomes Rs 44.6 crore, and year 5's Rs 68.0 crore becomes Rs 38.6 crore. The cash grows 8% a year and the discounting removes 12%, so each present value is a little smaller than the one before. The five together are Rs 208 crore.

YearFree cash flowDiscount factor at 12%Present value
150.00.89344.6
254.00.79743.0
358.30.71241.5
463.00.63640.0
568.00.56738.6
Terminal, at year 5884.30.567501.8
Enterprise value709.6
Rs crore. Five years of cash discount to Rs 208 crore and the terminal value to Rs 502 crore, so the enterprise value of Rs 710 crore is 71% terminal.
Step 2Where does the terminal value come from, and why is it so large?

Year 6 cash flow is year 5 grown at 4%, Rs 70.7 crore. A perpetuity growing at g and discounted at r is worth the next cash flow over (r less g). Rs 70.7 crore over (0.12 less 0.04) is Rs 884 crore at the end of year 5, and discounted five years at 12% it is Rs 502 crore today. It is large because the denominator is small: 8 percentage points. Every year after year 5 is being counted, and there are infinitely many of them.

The relationship
TV5=FCF5(1+g)r−g=68.0×1.040.12−0.04=884PV=8841.125=502TV_5 = \frac{FCF_5 (1+g)}{r - g} = \frac{68.0 \times 1.04}{0.12 - 0.04} = 884 \qquad PV = \frac{884}{1.12^5} = 502
FCF_5free cash flow in year 5, Rs crore
ggrowth after year 5, 4% a year for good
rthe 12% discount rate
What it says in wordsThe business after year 5 is valued as a growing perpetuity worth Rs 884 crore at that date, which is Rs 502 crore in today's money.
Present value of each year's cash and of the terminal value, Rs crore44.6Year 1FCF 50.043.0Year 2FCF 54.041.5Year 3FCF 58.340.0Year 4FCF 63.038.6Year 5FCF 68.0502Terminal value884 in year 5, discountedFive years of cash: Rs 208 crore29% of enterprise value71% of EVEnterprise value Rs 710 crore, of which Rs 502 crore rests on what happens after year 5
The five discounted cash flows are Rs 44.6 crore down to Rs 38.6 crore, while the discounted terminal value is Rs 502 crore, so 71% of the Rs 710 crore enterprise value depends on the perpetuity assumption rather than the five-year plan.
Step 3What should you tell the panel the number depends on?

The two inputs in the denominator of the terminal value, and the sanity check on it. Rs 884 crore at year 5 is 13.0x that year's free cash flow; if coatings businesses change hands at 10x cash flow, the perpetuity is generous, and the honest version of the model says so. Then show the grid: one point less on the discount rate adds Rs 104 crore, one point more on terminal growth adds Rs 77 crore, and the 8% growth over the five explicit years, which is what the plan actually commits to, matters far less than either.

EV, Rs croreg = 3%g = 4%g = 5%
r = 11%733813920
r = 12%650710787
r = 13%583629687
Enterprise value runs from Rs 583 crore at 13% and 3% growth to Rs 920 crore at 11% and 5%, a range that dwarfs anything the five-year plan can do, which is why the terminal assumptions are where the panel's questions will go.

Where candidates lose it

The usual loss is discounting the terminal value by six years, or not at all. It is a value at the end of year 5, so it carries the year 5 discount factor; the year 6 cash flow is only used to size it.

The second miss is presenting Rs 710 crore as the answer with no sensitivity. Seven tenths of the value rests on two assumptions, and a panel asking what the number depends on wants the grid and the implied exit multiple.

What the interviewer asks next

  • What implied exit multiple does the terminal value represent, and is it reasonable for a coatings business?
  • Net debt is Rs 150 crore. What is the equity value, and what would you pay for 100%?
  • How would you derive the 12% rather than take it as given?

Asked at HPS Investment Partners, Asset Management, New York, 2025 (Wall Street Oasis): then got sent the case study, very simple DCF for a fake business

Company names and figures are illustrative.