dcf-model

name dcf-model description Build discounted cash flow valuation workbooks in Excel. version 1.0.0 author Anthropic (adapted by Nous Research) license Apache-2.0 platforms ["linux","macos","windows"] metadata {"hermes":{"tags":["finance","valuation","dcf","excel","openpyxl","modeling","investment-banking"],"related_skills":["excel-author","pptx-author","comps-analysis","lbo-model","3-statement-model"]}} Environment This skill assumes headless openpyxl — you are producing an .xlsx file on disk. Follow the excel-author skill's conventions for cell coloring, formulas, named ranges, and sensitivity tables. Recalculate before delivery: python /path/to/excel-author/scripts/recalc.py ./out/model.xlsx . DCF Model Builder Overview This skill creates institutional-quality DCF models for equity valuation following investment banking standards. Each analysis produces a detailed Excel model (with sensitivity analysis included at the bottom of the DCF sheet). Tools Default to using all of the information provided by the user and MCP servers available for data sourcing. Critical Constraints - Read These First These constraints apply throughout all DCF model building. Review before starting: Formulas Over Hardcodes (NON-NEGOTIABLE): Every projection, margin, discount factor, PV, and sensitivity cell MUST be a live Excel formula — never a value computed in Python and written as a number When using openpyxl: ws["D20"] = "=D19*(1+$B$8)" is correct; ws["D20"] = calculated_revenue is WRONG The only hardcoded numbers permitted are: (1) raw historical inputs, (2) assumption drivers (growth rates, WACC inputs, terminal g), (3) current market data (share price, debt balance) If you catch yourself computing something in Python and writing the result — STOP. The model must flex when the user changes an assumption. Verify Step-by-Step With the User (DO NOT build end-to-end): After data retrieval → show the user the raw inputs block (revenue, margins, shares, net debt) and confirm before projecting After revenue projections → show the projected top line and growth rates, confirm before building margin build After FCF build → show the full FCF schedule, confirm logic before computing WACC After WACC → show the calculation and inputs, confirm before discounting After terminal value + PV → show the equity bridge (EV → equity value → per share), confirm before sensitivity tables Catch errors at each stage — a wrong margin assumption discovered after sensitivity tables are built means rebuilding everything downstream Sensitivity Tables: Use an ODD number of rows and columns (standard: 5×5, sometimes 7×7) — this guarantees a true center cell Center cell = base case. Build the axis values so the middle row header and middle column header exactly equal the model's actual assumptions (e.g., if base WACC = 9.0%, the middle row is 9.0%; if terminal g = 3.0%, the middle column is 3.0%). The center cell's output must therefore equal the model's actual implied share price — this is the sanity check that the table is built correctly. Highlight the center cell with the medium-blue fill ( #BDD7EE ) + bold font so it's immediately visible which cell is the base case. Populate ALL cells (typically 3 tables × 25 cells = 75) with full DCF recalculation formulas Use openpyxl loops to write formulas programmatically NO placeholder text, NO linear approximations, NO manual steps required Each cell must recalculate full DCF for that assumption combination Cell Comments: Add cell comments AS each hardcoded value is created Format: "Source: [System/Document], [Date], [Reference], [URL if applicable]" Every blue input must have a comment before moving to next section Do not defer to end or write "TODO: add source" Model Layout Planning: Define ALL section row positions BEFORE writing any formulas Write ALL headers and labels first Write ALL section dividers and blank rows second THEN write formulas using the locked row positions Test formulas immediately after creation Formula Recalculation: Run python recalc.py model.xlsx 30 before delivery Fix ALL errors until status is "success" Zero formula errors required (#REF!, #DIV/0!, #VALUE!, etc.) Scenario Blocks: Create separate blocks for Bear/Base/Bull cases Show assumptions horizontally across projection years within each block Use IF formulas: =IF($B$6=1,[Bear cell],IF($B$6=2,[Base cell],[Bull cell])) Verify formulas reference correct scenario block cells DCF Process Workflow Step 1: Data Retrieval and Validation Fetch data from MCP servers, user provided data, and the web. Data Sources Priority: MCP Servers (if configured) - Structured financial data from providers like Daloopa User-Provided Data - Historical financials from their research Web Search/Fetch - Current prices, beta, debt and cash when needed Validation Checklist: Verify net debt vs net cash (critical for valuation) Confirm diluted shares outstanding (check for recent buybacks/issuances) Validate historical margins are consistent with business model Cross-check revenue growth rates with industry benchmarks Verify tax rate is reasonable (typically 21-28%) Step 2: Historical Analysis (3-5 years) Analyze and document: Revenue growth trends : Calculate CAGR, identify drivers Margin progression : Track gross margin, EBIT margin, FCF margin Capital intensity : D&A and CapEx as % of revenue Working capital efficiency : NWC changes as % of revenue growth Return metrics : ROIC, ROE trends Create summary tables showing: Historical Metrics (LTM): Revenue: $X million Revenue growth: X% CAGR Gross margin: X% EBIT margin: X% D&A % of revenue: X% CapEx % of revenue: X% FCF margin: X% Step 3: Build Revenue Projections Methodology: Start with latest actual revenue (LTM or most recent fiscal year) Apply growth rates for each projection year Show both dollar amounts AND calculated growth % Growth Rate Framework: Year 1-2: Higher growth reflecting near-term visibility Year 3-4: Gradual moderation toward industry average Year 5+: Approaching terminal growth rate Formula structure: Revenue(Year N) = Revenue(Year N-1) × (1 + Growth Rate) Growth %(Year N) = Revenue(Year N) / Revenue(Year N-1) - 1 Three-scenario approach: Bear Case: Conservative growth (e.g., 8-12%) Base Case: Most likely scenario (e.g., 12-16%) Bull Case: Optimistic growth (e.g., 16-20%) Step 4: Operating Expense Modeling Fixed/Variable Cost Analysis: Operating expenses should model realistic operating leverage: Sales & Marketing : Typically 15-40% of revenue depending on business model Research & Development : Typically 10-30% for technology companies General & Administrative : Typically 8-15% of revenue, shows leverage as company scales Key principles: ALL percentages based on REVENUE, not gross profit Model operating leverage: % should decline as revenue scales Maintain separate line items for S&M, R&D, G&A Calculate EBIT = Gross Profit - Total OpEx Margin expansion framework: Current State → Target State (Year 5) Gross Margin: X% → Y% (justify based on scale, efficiency) EBIT Margin: X% → Y% (result of revenue growth + opex leverage) Step 5: Free Cash Flow Calculation Build FCF in proper sequence: EBIT (-) Taxes (EBIT × Tax Rate) = NOPAT (Net Operating Profit After Tax) (+) D&A (non-cash expense, % of revenue) (-) CapEx (% of revenue, typically 4-8%) (-) Δ NWC (change in working capital) = Unlevered Free Cash Flow Working Capital Modeling: Calculate as % of revenue change (delta revenue) Typical range: -2% to +2% of revenue change Negative number = source of cash (working capital release) Positive number = use of cash (working capital build) Maintenance vs Growth CapEx: Maintenance CapEx: Sustains current operations (~2-3% revenue) Growth CapEx: Supports expansion (additional 2-5% revenue) Total CapEx should align with company's growth strategy Step 6: Cost of Capital (WACC) Research CAPM Methodology for Cost of Equity: Cost of Equity = Risk-Free Rate + Beta × Equity Risk Premium Where: - Risk-Free Rate = Current 10-Year Treasury Yield - Beta = 5-year monthly stock beta vs market index - Equity Risk Premium = 5.0-6.0% (market standard) Cost of Debt Calculation: After-Tax Cost of Debt = Pre-Tax Cost of Debt × (1 - Tax Rate) Determine Pre-Tax Cost of Debt from: - Credit rating (if available) - Current yield on company bonds - Interest expense / Total Debt from financials Capital Structure Weights: Market Value Equity = Current Stock Price × Shares Outstanding Net Debt = Total Debt - Cash & Equivalents Enterprise Value = Market Cap + Net Debt Equity Weight = Market Cap / Enterprise Value Debt Weight = Net Debt / Enterprise Value WACC = (Cost of Equity × Equity Weight) + (After-Tax Cost of Debt × Debt Weight) Special Cases: Net Cash Position : If Cash > Debt, Net Debt is NEGATIVE Debt Weight may be negative WACC calculation adjusts accordingly No Debt : WACC = Cost of Equity Typical WACC Ranges: Large Cap, Stable: 7-9% Growth Companies: 9-12% High Growth/Risk: 12-15% Step 7: Discount Rate Application (5-10 Year Forecast) Mid-Year Convention: Cash flows assumed to occur mid-year Discount Period: 0.5, 1.5, 2.5, 3.5, 4.5, etc. Discount Factor = 1 / (1 + WACC)^Period Present Value Calculation: For each projection year: PV of FCF = Unlevered FCF × Discount Factor Example (Year 1): FCF = $1,000 WACC = 10% Period = 0.5 Discount Factor = 1 / (1.10)^0.5 = 0.9535 PV = $1,000 × 0.9535 = $954 Projection Period Selection: 5 years : Standard for most analyses 7-10 years : High growth companies with longer runway 3 years : Mature, stable businesses Step 8: Terminal Value Calculation Perpetuity Growth Method (Preferred): Terminal FCF = Final Year FCF × (1 + Terminal Growth Rate) Terminal Value = Terminal FCF / (WACC - Terminal Growth Rate) Critical Constraint: Terminal Growth < WACC (otherwise infinite value) Terminal Growth Rate Selection: Conservative: 2.0-2.5% (GDP growth rate) Moderate: 2.5-3.5% Aggressive: 3.5-5.0% (only for market leaders) Do not exceed : Risk-free rate or long-term GDP growth Exit Multiple Method (Alternative): Terminal Value = Final Year EBITDA × Exit Multiple Where Exit Multiple comes from: - Industry comparable trading multiples - Precedent transaction multiples - Typical range: 8-15x EBITDA Present Value of Terminal Value: PV of Terminal Value = Terminal Value / (1 + WACC)^Final Period Where Final Period accounts for timing: 5-year model with mid-year convention: Period = 4.5 Terminal Value Sanity Check: Should represent 50-70% of Enterprise Value If >75%, model may be over-reliant on terminal assumptions If <40%, check if terminal assumptions are too conservative Step 9: Enterprise to Equity Value Bridge Valuation Summary Structure: (+) Sum of PV of Projected FCFs = $X million (+) PV of Terminal Value = $Y million = Enterprise Value = $Z million (-) Net Debt [or + Net Cash if negative] = $A million = Equity Value = $B million ÷ Diluted Shares Outstanding = C million shares = Implied Price per Share = $XX.XX Current Stock Price = $YY.YY Implied Return = (Implied Price / Current Price) - 1 = XX% Critical Adjustments: Net Debt = Total Debt - Cash & Equivalents If positive: Subtract from EV (reduces equity value) If negative (Net Cash): Add to EV (increases equity value) Use Diluted Shares : Includes options, RSUs, convertible securities Other adjustments (if applicable): Minority interests Pension liabilities Operating lease obligations Valuation Output Format: Valuation Component,Amount ($M) PV Explicit FCFs,X.X PV Terminal Value,Y.Y Enterprise Value,Z.Z (-) Net Debt,A.A Equity Value,B.B ,, Shares Outstanding (M),C.C Implied Price per Share,$XX.XX Current Share Price,$YY.YY Implied Upside/(Downside),+XX% Step 10: Sensitivity Analysis Build three sensitivity tables at the bottom of the DCF sheet showing how valuation changes with different assumptions: WACC vs Terminal Growth - Shows enterprise value sensitivity to discount rate and perpetuity growth Revenue Growth vs EBIT Margin - Shows impact of top-line growth and operating leverage Beta vs Risk-Free Rate - Shows sensitivity to cost of equity components Implementation : These are simple 2D grids (NOT Excel's "Data Table" feature) with formulas in each cell. Each cell must contain a full DCF recalculation for that specific assumption combination. See Critical Constraints section for detailed requirements on populating all 75 cells programmatically using openpyxl. <correct_patterns> This section contains all the CORRECT patterns to follow when building DCF models. Scenario Block Selection Pattern - Follow This Approach Assumptions are organized in separate blocks for each scenario: CRITICAL STRUCTURE - Three rows per section header: BEAR CASE ASSUMPTIONS (section header, merge cells across) Assumption,FY1,FY2,FY3,FY4,FY5 Revenue Growth (%),12%,10%,9%,8%,7% EBIT Margin (%),45%,44%,43%,42%,41% BASE CASE ASSUMPTIONS (section header, merge cells across) Assumption,FY1,FY2,FY3,FY4,FY5 Revenue Growth (%),16%,14%,12%,10%,9% EBIT Margin (%),48%,49%,50%,51%,52% BULL CASE ASSUMPTIONS (section header, merge cells across) Assumption,FY1,FY2,FY3,FY4,FY5 Revenue Growth (%),20%,18%,15%,13%,11% EBIT Margin (%),50%,51%,52%,53%,54% Each scenario block MUST have a column header row showing the projection years (FY2025E, FY2026E, etc.) immediately below the section title. Without this, users cannot tell which assumption value corresponds to which year. How to reference assumptions - Create a consolidation column: Case selector cell (e.g., B6) contains 1=Bear, 2=Base, or 3=Bull Create a consolidation column with INDEX or OFFSET formulas to pull from the correct scenario block Projection formulas reference the consolidation column (clean cell references) Each scenario block contains full set of DCF assumptions across projection years Recommended consolidation column pattern (using INDEX): =INDEX(B10:D10, 1, $B$6) NOT this - scattered IF statements throughout: =IF($B$6=1,[Bear block cell],IF($B$6=2,[Base block cell],[Bull block cell])) The consolidation column approach centralizes logic and makes the model easier to audit. Correct Revenue Projection Pattern Create a consolidation column with INDEX formulas, then reference it in projections: Step 1 - Consolidation column for FY1 growth: =INDEX([Bear FY1 growth]:[Bull FY1 growth], 1, $B$6) Step 2 - Revenue projection references the consolidation column: Revenue Year 1: =D29*(1+$E$10) Where: D29 = Prior year revenue $E$10 = Consolidation column cell for FY1 growth (contains INDEX formula) $B$6 = Case selector (1=Bear, 2=Base, 3=Bull) This approach is cleaner than embedding IF statements in every projection formula and makes it much easier to audit which scenario assumptions are being used. Correct FCF Formula Pattern Use consolidation columns with INDEX formulas, then reference them in FCF calculations: Consolidation column approach: Item,Formula,Reference D&A,=E29*$E$21,$E$21 = consolidation column for D&A % CapEx,=E29*$E$22,$E$22 = consolidation column for CapEx % Δ NWC,=(E29-D29)*$E$23,$E$23 = consolidation column for NWC % Unlevered FCF,=E57+E58-E60-E62,E57=NOPAT E58=D&A E60=CapEx E62=Δ NWC