1. The Theory of Intrinsic Value
The absolute valuation framework assumes that the true, intrinsic value of any financial asset is equal to the mathematically determined present value of all its projected future cash flows, discounted back to the present day using an appropriate risk-adjusted interest rate.
 
2. Free Cash Flow to Firm (FCFF) Modeling
Instead of relying on accounting net income, absolute valuation models project Free Cash Flow to Firm (FCFF). This represents the true, unencumbered operating cash generated by the business that is available for distribution to all capital providers (both debt holders and equity shareholders) after covering all necessary operating expenses and internal capital reinvestments.
FCFF Calculation Formula
FCFF = EBIT × (1 − T) + Depreciation & Amortization − Capital Expenditures (CapEx) − Δ Net Working Capital
 
3. The Two-Stage DCF Valuation Structure
Corporate operations are modeled in two distinct phases: a near-term high-growth forecasting phase (typically 5 to 10 years), followed by a mature terminal phase extending into infinity.
  Stage 1: Explicit Projection Period (Years 1 - 5)     Stage 2: Terminal Value (Infinity)
  ┌───────┬───────┬───────┬───────┬───────┐            ┌────────────────────────┐
  │ FCFF₁ │ FCFF₂ │ FCFF₃ │ FCFF₄ │ FCFF₅ │            │     Terminal Value     │
  └───┬───┴───┬───┴───┬───┴───┬───┴───┬───┘            └───────────┬────────────┘
      │       │       │       │       │                            │
      ▼       ▼       ▼       ▼       ▼ Discounted at WACC         ▼
  ┌─────────────────────────────────────────────────────────────────────────────┐
  │                         TOTAL ENTERPRISE VALUE                              │
  └─────────────────────────────────────────────────────────────────────────────┘

The Gordon Growth Terminal Value Formula
To capture the value of all cash flows beyond the explicit forecast period, assuming the mature firm grows at a stable, long-term sustainable rate (\(g_{n}\)):

Terminal Value (TV)_n = FCFF_n × (1 + g_n) / (WACC − g_n)
Total Firm Enterprise Value

Enterprise Value = Σ_{t=1}^{n} (FCFF_t / (1 + WACC)^t) + (Terminal Value_n / (1 + WACC)^n)

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