DCF Model Pre-Flight Checklist

P&L, balance sheet, and cash flow statement for at least 5 fiscal years. Ensure net income reconciles to operating cash flow. Any restatements or discontinued operations should be clearly flagged and excluded from the projection base.

Your projected growth rates should be justified against industry CAGR, analyst consensus, and the company's own track record. A growth rate that exceeds the industry average needs an explicit, documented reason. Eyeballed rates do not survive due diligence.

If margins expand over the projection period, state why: economies of scale, SG&A leverage, pricing power, mix shift. "Margins improve toward industry average" is not a driver — it is a hope. Every margin assumption needs a mechanism.

Working capital should be expressed as a percentage of revenue (or revenue change for the NWC build), not held as a fixed dollar amount across the projection period. Static NWC models systematically understate or overstate cash conversion as the business scales.

Total capex should be decomposed into maintenance capex (required to sustain current operations) and growth capex (invested to generate incremental revenue). In the terminal year, growth capex should converge toward zero if the terminal growth rate implies a maturing business.

Use the company's effective tax rate (from the income tax footnote), not the headline statutory rate. For projections, consider deferred tax liabilities, NOL carryforwards, and any known changes in tax status. The statutory rate can overstate taxes by 3–8 percentage points for many businesses.

Cost of equity should use CAPM: risk-free rate + (beta × equity risk premium). Cost of debt should be after-tax: pre-tax rate × (1 − tax rate). Capital structure weights should reflect target (long-run) proportions, not current book values. Document each component with a source.

The terminal growth rate represents the perpetual growth rate of free cash flows. It cannot sustainably exceed the nominal growth rate of the economy the business operates in. For most companies, a rate between 2% and 3% is defensible. Higher rates require explicit justification.

When terminal value exceeds 70% of your total enterprise value, the model is more sensitive to your terminal assumptions than to the forecast period. This is not automatically wrong, but it must be disclosed and stress-tested. Document the split and show what happens when terminal growth drops by 0.5%.

A two-variable sensitivity table showing enterprise value across a range of WACC and terminal growth rate combinations. The base case should sit near the center. If the entire table shows a wide range, present the full range — do not anchor to the case that supports your conclusion.

Each scenario should change a coherent set of assumptions together (not just one lever). Bear: revenue growth misses, margins compress, WACC rises. Bull: growth accelerates, operating leverage materializes, financing improves. Name the driver (e.g., "market share loss" not just "lower revenue").

Back-calculate the multiples implied by your DCF output and compare them to the trading range of comparable companies. If your model implies a 25× EV/EBITDA for a business where comps trade at 10–14×, either the model is aggressive or the business is genuinely exceptional — you need to know which before you walk into that room.