The DCF, straight off the model

A DCF is not a separate model bolted on at the end. It hangs off the three statements you have already built: it takes the operating profit from the income statement, the depreciation and capex from the fixed-asset schedule, and the working-capital movement from the cash flow, and it rearranges them into the one number a valuation actually discounts — free cash flow. If the statements link and balance, the DCF is mostly a matter of pulling the right lines and discounting them. This module does exactly that for Sokoni, and lands at a value per share of about KES 1.10. Its companion is the LeadAfrik DCF Valuation course, which treats every input at length; here we keep each piece tight and point there for the full derivation.

Unlevered free cash flow: the number you discount

The cash flow a DCF discounts is free cash flow to the firm (FCFF) — unlevered cash flow, the cash the operating business throws off that is available to all providers of capital, debt-holders and shareholders alike, before any of it is paid out as interest. The bridge is: FCFF = EBIT × (1 − t) + D&A − capex − ΔNWC. Read it left to right: start with operating profit, tax it as if the firm had no debt to get NOPAT, add back depreciation because it reduced profit but consumed no cash this period, subtract the capex that actually did consume cash, and subtract the increase in working capital that growth ties up in receivables and inventory. The result is unlevered because nothing about how Sokoni is financed has touched it yet — financing enters later, through the discount rate.

It has to be unlevered, and this is the error that catches every junior: you do not discount net income. Net income has already had interest expense taken out of it, and the discount rate — WACC — already prices the cost of debt through its debt component. Discount net income at WACC and you charge the company for its debt twice, once in the cash flow and once in the rate, understating value by a wide margin. Starting from EBIT and taxing it as if debt did not exist keeps the operating business and its financing cleanly separate, which is the whole point of an enterprise valuation. For Sokoni's first forecast year the bridge reads: EBIT 170,000, taxed at 30% to a NOPAT of 119,000; add depreciation of 50,000; subtract capex of 132,000 and the working-capital increase of 10,685; FCFF = 26,315. Running the same pull across all five years gives an FCFF stream of 26,315, 29,907, 33,761, 37,915, and 42,406 (KES thousands).

A working WACC, kept tight

FCFF is discounted at the weighted average cost of capital — the blended return Sokoni's debt and equity providers together require. In full it is WACC = [E / (D+E)] × Ke + [D / (D+E)] × Kd × (1 − t): the cost of equity Ke (built from CAPM as the risk-free rate plus beta times the equity risk premium) and the after-tax cost of debt, each weighted by its share of the capital structure at market values. For Sokoni the after-tax cost of debt is real and observable from the model's own assumptions — 12% pre-tax, or 12% × (1 − 0.30) = 8.4% after the tax shield — while Ke for a Kenyan mid-cap built through CAPM typically lands in the high teens to low twenties. Blended at Sokoni's capital structure, those combine to a WACC of 15%, which is the rate we adopt here. The full build — choosing the risk-free rate, estimating beta for a thinly-traded name, and navigating the country-risk-premium debate — is the DCF Valuation course's territory, and the interactive /dcf-model lets you move each input and watch the answer respond. What matters for this module is that 15% is a defensible blended rate, and that a 100 basis-point error in it moves the valuation by more than 10%.

Terminal value, and why it dominates

You cannot forecast Sokoni line by line to infinity, so the explicit forecast stops at year five and a terminal value captures every cash flow from year six onward as a single figure at the end of year five. There are two standard methods. Gordon growth treats the year-five FCFF as growing at a constant perpetual rate forever: TV = FCFF₅ × (1 + g) / (WACC − g). At g = 4% that is 42,406 × 1.04 / (0.15 − 0.04) ≈ 400,932. The exit-multiple method instead applies a market EV/EBITDA multiple to year-five EBITDA, grounding the terminal figure in what comparable businesses actually trade for. Best practice is to compute both and reconcile them; they should point to a similar place. Terminal value is not a footnote — in a five-year DCF it typically carries 65-85% of the entire answer, so it deserves the majority of your scrutiny.

From enterprise value to value per share

The assembly is mechanical once the pieces are in place. Discount each year's FCFF back to today at 15%, discount the terminal value back from year five at the same rate, and sum the two to reach enterprise value — the value of the whole operating business, to everyone who financed it. Then bridge from enterprise value to equity: subtract net debt, because the debt-holders have first claim on the business and what remains belongs to shareholders. Sokoni's net debt is debt minus cash, 300,000 − 100,000 = 200,000. Enterprise value of 309,790 less net debt of 200,000 leaves equity value of 109,790, and dividing by the 100,000 shares outstanding gives roughly KES 1.10 per share. That single number is the output the entire model — three linked statements, supporting schedules, and a discounted cash flow — exists to produce, and every figure behind it traces back to a labelled, changeable assumption.

• Pull FCFF from the statements — EBIT × (1 − 0.30) + D&A − capex − ΔNWC for each year: 26,315, 29,907, 33,761, 37,915, 42,406 (KES thousands).
• Discount the explicit FCFF at WACC 15% — present values 22,883, 22,614, 22,199, 21,678, 21,083, which sum to a PV of explicit cash flow of 110,456.
• Terminal value (Gordon) — TV₅ = 42,406 × 1.04 / (0.15 − 0.04) ≈ 400,932; discounted from year five it is worth 199,334 today.
• Enterprise value — PV of explicit FCFF + PV of terminal value = 110,456 + 199,334 = 309,790.
• Bridge to equity — EV − net debt (300,000 debt − 100,000 cash = 200,000) = 109,790 equity value.
• Value per share — 109,790 / 100,000 shares ≈ KES 1.10. Sanity check: terminal value is 199,334 / 309,790 = 64% of EV.