OWNER EARNINGS / LISTED COMPANIES / FREE TOOL

Equity cash-flow and reverse valuation

Value an explicitly defined equity cash claim, inspect terminal-value dependence, and solve for growth implied by a dated share price.

Parts 6 and 10; Appendix 01 §A1.4 and workbook Valuation!C16:G25. Fictional populated example; no issuer valuation is implied. Inputs are illustrative assumptions, not live prices or investment recommendations.

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Scenario and units

Scenario / evidence label:

Currency:

Amount and share-count scale:Use the same scale for money and share counts. Money divided by shares then gives currency per share.

Period / valuation date:

Equity cash claim and rates

Normalized annual cash flow to ordinary equity, after required reinvestment and financing:Use an equity cash claim, not FCFF. Include reinvestment needed for the growth you enter; maintenance-only earnings are not automatically distributable.

Annual equity cash-flow growth for years 1–5 (%):Enter a percentage, for example 10 for 10%.

Required return on equity (%):Enter a percentage, for example 10 for 10%.

Perpetual growth after year 5 (%):Enter a percentage, for example 10 for 10%.

Per-share comparison

Diluted share count, on the selected scale:

Dated market price (currency per share; optional):

User-selected margin below modeled value (%):Enter a percentage, for example 10 for 10%.

Restore teaching example

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Your scenario, step by step.

Fictional teaching case · Illustrative annual period. Currency: KES; money and shares: million. Prices and per-share results use whole currency units per share. Percentage columns show percentages; discount factors are unitless.

Modeled equity value per share28.9242

Selected margin threshold per share21.6932

Price-implied five-year growth (%)5.88

Five-year equity cash-flow forecast

Year	Equity cash flow	Discount factor	Present value
1	105	0.9091	95.4545
2	110.25	0.8264	91.1157
3	115.7625	0.7513	86.9741
4	121.5506	0.683	83.0207
5	127.6282	0.6209	79.247

Equity valuation bridge

Measure	Value
PV of years 1–5	435.8121
Terminal value at year 5	1,627.259
PV of terminal value	1,010.3998
Total equity value	1,446.2119
Terminal contribution (%)	69.8653
Diluted shares	50
Value per share	28.9242
Entered market price	30
Modeled value relative to price (%)	-3.5859

Sensitivity — unavailable where discount ≤ terminal growth

Equity discount (%)	Terminal growth (%)	Value per share
8	1	34.2627
8	2	38.7298
8	3	44.9839
10	1	26.5028
10	2	28.9242
10	3	32.0375
12	1	21.573
12	2	23.0477
12	3	24.8502

Interpret the result.

Implied annual growth for years 1–5, holding discount rate, terminal growth and shares fixed; not a forecast.

This is a direct equity valuation. Do not subtract net debt again; use the existing FCFF/WACC tool for an enterprise-value calculation.

The starting equity cash flow and its growth must already allow for required reinvestment and financing claims. A maintenance-only owner-earnings estimate is not automatically this cash flow.

Shares are held constant. This model does not forecast dilution, changing payout rules or annual capital needs. The selected margin is a scenario threshold, not a buy recommendation.

Formulae and symbol definitions.

F_t=F_0(1+g)^t,\qquad TV_5=\frac{F_5(1+g_T)}{k_e-g_T}

Year-t equity cash flow grows from the starting amount. Terminal value at year 5 uses year-6 cash flow; the equity discount rate must exceed perpetual growth.

V_E=\sum_{t=1}^{5}\frac{F_t}{(1+k_e)^t}+\frac{TV_5}{(1+k_e)^5},\qquad v=\frac{V_E}{n}

Equity value is the discounted forecast plus discounted terminal value. Divide by diluted shares; do not subtract net debt again.

v(g_{\mathrm{implied}})=P,\qquad P_m=v(1-m)

Reverse valuation solves five-year growth with other assumptions fixed. The selected margin threshold is modeled value times one minus the user margin.

Symbol	Definition and units
$$F_0,F_t$$ F0, Ft	Starting and forecast annual cash available to equity after reinvestment and financing; not FCFF.
$$t$$ t	End-of-year period, 1 through 5.
$$g,g_T$$ g, gT	Five-year and perpetual annual growth, decimals in equations.
$$k_e$$ ke	Required annual return on equity as a decimal.
$$TV_5$$ TV5	Value at the end of year 5, discounted once to the present.
$$V_E,v,n$$ VE, v, n	Total equity value, value per share, and diluted share count. Money and shares use the same scale.
$$P$$ P	Optional dated market price, currency per share.
$g_{\mathrm{implied}}$ Implied growth	Solved annual growth for years 1–5, bounded between −99% and +100%.
$$m,P_m$$ m, Pm	User-selected margin as a decimal and resulting price threshold; not a recommendation.

Read the research and workbook evidence.

Open the companion article →

Existing FCFF/WACC valuation explorer · Detailed workbook library

Method background: Berkshire Hathaway’s 1986 owner-earnings discussion. Filings require accounting interpretation; these tools do not fetch SEC or NSE data automatically.

Symbol	Definition and units
$\(F_0,F_t\)$ F0, Ft	Starting and forecast annual cash available to equity after reinvestment and financing; not FCFF.
$\(t\)$ t	End-of-year period, 1 through 5.
$\(g,g_T\)$ g, gT	Five-year and perpetual annual growth, decimals in equations.
$\(k_e\)$ ke	Required annual return on equity as a decimal.
$\(TV_5\)$ TV5	Value at the end of year 5, discounted once to the present.
$\(V_E,v,n\)$ VE, v, n	Total equity value, value per share, and diluted share count. Money and shares use the same scale.
$\(P\)$ P	Optional dated market price, currency per share.
$g_{\mathrm{implied}}$ Implied growth	Solved annual growth for years 1–5, bounded between −99% and +100%.
$\(m,P_m\)$ m, Pm	User-selected margin as a decimal and resulting price threshold; not a recommendation.