// v4/lesson-5-pages.jsx — Chapter V · DCF, Used Correctly · all 8 lessons. const V4_CH5_LESSONS = [ ['5.01', 'DCF as stress test', 'lesson-5-01.html'], ['5.02', 'The three SME failure modes', 'lesson-5-02.html'], ['5.03', 'NZ WACC build-up, from scratch','lesson-5-03.html'], ['5.04', 'Terminal value, bounded', 'lesson-5-04.html'], ['5.05', 'Choosing the forecast horizon','lesson-5-05.html'], ['5.06', 'The mid-period convention', 'lesson-5-06.html'], ['5.07', 'When to abandon DCF entirely', 'lesson-5-07.html'], ['5.08', 'Three DCFs, defended', 'lesson-5-08.html'], ]; const ch5 = { chapterRoman: 'V', chapterTitle: 'DCF, Used Correctly', chapterHref: 'chapter-05.html', lessonsInChapter: V4_CH5_LESSONS, }; const HL = { background: '#f2e600', padding: '0 10px', boxShadow: `4px 4px 0 #0d0d0d` }; // ============================================================================ // 5.01 — FREE preview · full content // ============================================================================ function V4Lesson501() { const v4 = window.v4; const { V4DropCap, V4H2 } = window; return DCF as stress test, not answer.} brief={<>The opening lesson of the DCF chapter. In SME work, a DCF is a discipline for inspecting the assumptions implicit in a multiple — not a competitor to multiples for the headline number. Mistaking the deliverable produces inflated valuations that diligence breaks.} readMins={3} body={<> sk a hundred working SME analysts what their DCF model produced on their last file, and ninety-five will reach for a number. Ask the same hundred what the DCF was for, and the answers thin out. The discipline this chapter teaches is not how to build a DCF — that is the thirty percent — but how to use one. In SME work, a DCF is rarely the primary methodology. It is a stress test on the primary, performed in a defensible form. The asymmetry of DCF in SME work

DCF dominates the listed-equity world for reasons that do not survive the transition to SMEs. Listed companies have observable beta, scaled operations, and a structural posture that supports the explicit-plus-terminal framing. Listed analysts use DCF as primary methodology in 50-70% of working files. SME analysts who do the same routinely produce valuation conclusions that diligence picks apart.

The asymmetry has a name: the three SME failure modes of DCF (terminal-value bloat, ad-hoc WACC, the wrong horizon) sit at the heart of the chapter and are covered in lesson 5.02. Each, applied with textbook discipline rather than SME discipline, produces an over-valued result. The compound effect of all three is the SME-DCF-of-a-bad-analyst that experienced buyers know to discount on sight.

What DCF is for, in SME practice

Three legitimate uses of DCF in SME work. One: as a stress test on the multiple. Build a DCF, see what implicit WACC and growth produce the buyer’s multiple, and ask whether each input is defensible. This is lesson 2.03 (multiples as shorthand DCF) reversed — and it is the most common legitimate use.

Two: as primary on businesses with clear, defensible, multi-year forecasts and no comparable set. Vertical SaaS with disclosed customer cohort data. A regulated business with locked-in pricing. A long-term-contracted services business with three years of explicit forecast supported by contracts. This use accounts for perhaps 15-20% of SME files.

Three: as discipline-of-record on files where the file itself will be reviewed (credit committee, court, regulator). A DCF written down with its assumptions exposed is the form of valuation that survives external review. The conclusion is rarely the DCF’s output number; it is the file’s defensibility, of which the DCF is a part.

The chapter map

The chapter walks through the three failure modes (5.02), builds an NZ WACC from inputs (5.03), bounds terminal value (5.04), chooses a horizon (5.05), covers the mid-period convention (5.06), gives the criterion for abandoning DCF entirely (5.07), and closes with three worked DCFs, in outline (5.08). By the end, the reader should be able to build a defensible DCF on any SME file inside three hours, with a working file a credit committee or court would accept.

} pullQuote={<>In SME work, a DCF is a stress test on the multiple — not a competitor to multiples for the headline number. The three failure modes (terminal bloat, ad-hoc WACC, wrong horizon) make textbook-trained analysts produce SME DCFs experienced buyers discount on sight.} takeaway={<>DCF is rarely primary in SME work. Three legitimate uses: stress test on multiples (most common), primary on contract-supported forecast businesses (15-20% of files), discipline-of-record on review-bound files. The chapter teaches the three together.} prevHref={null} nextHref="lesson-5-02.html" nextNum="5.02" nextTitle="The three SME failure modes" />; } // ============================================================================ // helper // ============================================================================ function makeLocked5({ num, title, brief, readMins, intro, memberBody, pullQuote, takeaway, lockedBundled, prevHref, prevNum, prevTitle, nextHref, nextNum, nextTitle }) { return function Lesson() { return ; }; } // ============================================================================ // 5.02 — Three failure modes // ============================================================================ const V4Lesson502 = makeLocked5({ num: '5.02', title: <>The three SME failure modes., brief: <>Terminal-value bloat, ad-hoc WACC, wrong horizon. The three places SME DCF reliably lies, with diagnostics for each. Recognising one of the three saves a week of model-building; recognising two saves the file., readMins: 4, intro: <> {(() => { const { V4DropCap, V4H2 } = window; const v4 = window.v4; return <> CF models on SME files fail in three reliable ways. The failures are not subtle — every one of them is visible on the first pass of the model output — but they are routinely overlooked because the analyst is focused on the headline conclusion rather than the structural integrity of the inputs. The three failure modes, named explicitly, become a checklist. 1 · Terminal-value bloat

On most SME DCF models, the terminal value accounts for 70-85% of the enterprise value conclusion. A model where the terminal value dominates so completely is not a DCF — it is a Gordon growth model dressed up with an explicit-period spreadsheet. Lesson 5.04 covers the discipline for bounding terminal value; the failure mode here is recognising that the imbalance exists.

; })()} , prevHref: 'lesson-5-01.html', prevNum: '5.01', prevTitle: 'DCF as stress test', nextHref: 'lesson-5-03.html', nextNum: '5.03', nextTitle: 'NZ WACC build-up, from scratch', }); // ============================================================================ // 5.03 — WACC build-up // ============================================================================ const V4Lesson503 = makeLocked5({ num: '5.03', title: <>NZ WACC build-up, from scratch., brief: <>Risk-free + ERP + size premium + specific company risk, with current NZ inputs and a defended audit trail for every component. The longest single technical lesson in the chapter — and the one that produces a working file a credit committee will accept., readMins: 4, intro: <> {(() => { const { V4DropCap, V4H2 } = window; const v4 = window.v4; return <> he WACC build-up is the single most-disputed input in any SME DCF and the input most often presented without defence. This lesson walks through the four components — risk-free rate, equity risk premium, size premium, specific company risk premium — using current NZ inputs and a defended audit trail. The output is a number; the work is the audit trail. 1 · Risk-free rate

The risk-free rate is the easiest of the four components and the one most often mishandled. The convention is to use a long-dated New Zealand Government Bond yield — typically the 10-year benchmark — measured at the valuation date. As of May 2026, the 10-year NZGB is 4.3%. Not the 1-year, not the 5-year, not "the prevailing rate" — the specific maturity matching the valuation horizon, at the specific date.

; })()} , prevHref: 'lesson-5-02.html', prevNum: '5.02', prevTitle: 'The three SME failure modes', nextHref: 'lesson-5-04.html', nextNum: '5.04', nextTitle: 'Terminal value, properly bounded', }); // ============================================================================ // 5.04 — Terminal value // ============================================================================ const V4Lesson504 = makeLocked5({ num: '5.04', title: <>Terminal value, properly bounded., brief: <>Gordon growth vs exit-multiple vs liquidation. When each is appropriate, and how to defend the choice. Why the Gordon growth terminal default produces terminal-value bloat — and the two tests that catch it before the model ships., readMins: 4, intro: <> {(() => { const { V4DropCap, V4H2 } = window; const v4 = window.v4; return <> erminal value is where SME DCFs go to die. On a five-year explicit period at a 15% WACC, the terminal value almost always accounts for 70-80% of the enterprise value conclusion. That dominance — combined with the fragility of terminal-period assumptions — means the entire DCF is, in effect, a Gordon growth model with an expensive forecast layered on top. The discipline is to bound terminal value properly. Three terminal frameworks

Three frameworks for terminal value. Gordon growth: perpetual growth at a stable rate, the textbook default. Exit multiple: terminal-period EBITDA capitalised at a defended exit multiple (the SME variant of the listed-market terminal). Liquidation: realisable asset value at the terminal horizon, for businesses without a credible perpetual proposition.

; })()} , prevHref: 'lesson-5-03.html', prevNum: '5.03', prevTitle: 'NZ WACC build-up, from scratch', nextHref: 'lesson-5-05.html', nextNum: '5.05', nextTitle: 'Choosing the forecast horizon', }); // ============================================================================ // 5.05 — Horizon // ============================================================================ const V4Lesson505 = makeLocked5({ num: '5.05', title: <>Choosing the forecast horizon., brief: <>Why five years is the wrong answer for two-thirds of SMEs. The horizon-by-archetype guide — and the question that, asked properly, picks the horizon in two minutes rather than two days., readMins: 3, intro: <> {(() => { const { V4DropCap, V4H2 } = window; const v4 = window.v4; return <> he textbook five-year forecast horizon is wrong for about two-thirds of SME DCF files. It is the default because it is convenient — spreadsheet templates ship with five columns, the financial-modelling courses teach five years, the audience for the deliverable expects five years. None of these are reasons to use five years on a specific file. The right question

The right question is not "how long should the forecast be" but "what changes in the business that the explicit period needs to capture, and how long does that take." Asked properly, the horizon picks itself.

; })()} , prevHref: 'lesson-5-04.html', prevNum: '5.04', prevTitle: 'Terminal value, properly bounded', nextHref: 'lesson-5-06.html', nextNum: '5.06', nextTitle: 'The mid-period convention', }); // ============================================================================ // 5.06 — Mid-period // ============================================================================ const V4Lesson506 = makeLocked5({ num: '5.06', title: <>The mid-period convention., brief: <>A small numerical adjustment most analysts skip, that moves SME valuations by 4-6%. The mid-period (or half-year) convention, why it matters more for SMEs than for listed companies, and how to implement it in two cells., readMins: 3, intro: <> {(() => { const { V4DropCap, V4H2 } = window; const v4 = window.v4; return <> he mid-period convention is the smallest correction in the chapter and one of the most reliably skipped. The standard DCF discounts each year’s cash flow to the present using a full-period discount factor — i.e. year-one cash is discounted as if received at the end of year one. This is wrong, because cash flow accrues across the year rather than concentrating at year-end. The mid-period convention corrects for this. ; })()} , prevHref: 'lesson-5-05.html', prevNum: '5.05', prevTitle: 'Choosing the forecast horizon', nextHref: 'lesson-5-07.html', nextNum: '5.07', nextTitle: 'When to abandon DCF entirely', }); // ============================================================================ // 5.07 — Abandon DCF // ============================================================================ const V4Lesson507 = makeLocked5({ num: '5.07', title: <>When to abandon DCF entirely., brief: <>Four signatures of files where DCF should be set aside and a market or asset approach pulled forward. The mirror image of lesson 4.09 — the chapter that closes the methodology pair., readMins: 4, intro: <> {(() => { const { V4DropCap, V4H2 } = window; const v4 = window.v4; return <> he chapter has spent six lessons on the discipline of DCF. The seventh is the discipline of not using it. About half of SME files — paradoxically, given the textbook centrality of DCF — are cases where the methodology should not be the primary at all. Recognising the four signatures saves a week of model-building. Four signatures

Four reliable signals that DCF should be abandoned as primary methodology. (1) The trailing-period earnings are not credibly representative of forward-period earnings. (2) The comparable-set is deep enough to support a multiples-led conclusion. (3) The terminal value would account for over 90% of EV under reasonable assumptions. (4) The forecast inputs cannot be defended within ±15% confidence intervals.

; })()} , prevHref: 'lesson-5-06.html', prevNum: '5.06', prevTitle: 'The mid-period convention', nextHref: 'lesson-5-08.html', nextNum: '5.08', nextTitle: 'Three DCFs, defended', }); // ============================================================================ // 5.08 — Three DCFs // ============================================================================ const V4Lesson508 = makeLocked5({ num: '5.08', title: <>Three DCFs, defended., brief: <>The capstone of the chapter. A stable industrial, a growth SaaS, a cyclical materials business — each worked in outline to a defended verdict. The capstone shows the methodology in three different SME archetypes., readMins: 4, intro: <> {(() => { const { V4DropCap, V4H2 } = window; const v4 = window.v4; return <> he chapter closes with three complete DCFs, each for a different SME archetype, each producing a defended verdict. The point is to show what the chapter’s discipline produces in practice — three working files that a credit committee, a buyer’s diligence team, or a court could read and accept. ; })()} , prevHref: 'lesson-5-07.html', prevNum: '5.07', prevTitle: 'When to abandon DCF entirely', nextHref: null, }); Object.assign(window, { V4Lesson501, V4Lesson502, V4Lesson503, V4Lesson504, V4Lesson505, V4Lesson506, V4Lesson507, V4Lesson508, });