From ccdc3572c802a29f54ceb85d020bb9ab8ffe040c Mon Sep 17 00:00:00 2001
From: Tyler Hoang <tyler@tylerhoang.xyz>
Date: Mon, 29 Jun 2026 01:37:18 -0700
Subject: test: add DCF and valuation backend tests

---
 backend/tests/test_dcf_edge_cases.py | 155 +++++++++++++++++++++++++++++++++++
 1 file changed, 155 insertions(+)
 create mode 100644 backend/tests/test_dcf_edge_cases.py

(limited to 'backend/tests/test_dcf_edge_cases.py')

diff --git a/backend/tests/test_dcf_edge_cases.py b/backend/tests/test_dcf_edge_cases.py
new file mode 100644
index 0000000..94a960b
--- /dev/null
+++ b/backend/tests/test_dcf_edge_cases.py
@@ -0,0 +1,155 @@
+"""Boundary and invalid-input tests for the DCF engine."""
+
+import pandas as pd
+import pytest
+
+from app.services.data_service import _run_dcf
+
+
+def _fcf_series(base: float, growth: float) -> pd.Series:
+    """Return a two-point historical FCF series whose median YoY growth equals `growth`."""
+    prior = base / (1 + growth)
+    return pd.Series([prior, base], index=pd.to_datetime(["2023-09-30", "2024-09-30"]))
+
+
+def _expected_mid_year_enterprise_value(
+    base_fcf: float,
+    growth: float,
+    wacc: float,
+    terminal_growth: float,
+    projection_years: int,
+) -> float:
+    projected = [base_fcf * ((1 + growth) ** year) for year in range(1, projection_years + 1)]
+    discounted = [fcf / ((1 + wacc) ** (year - 0.5)) for year, fcf in enumerate(projected, start=1)]
+    terminal_fcf = projected[-1] * (1 + terminal_growth)
+    terminal_value = terminal_fcf / (wacc - terminal_growth)
+    terminal_value_pv = terminal_value / ((1 + wacc) ** (projection_years - 0.5))
+    return sum(discounted) + terminal_value_pv
+
+
+def test_run_dcf_two_year_horizon_uses_mid_year_discounting() -> None:
+    fcf = _fcf_series(100.0, 0.05)
+    expected_enterprise_value = _expected_mid_year_enterprise_value(
+        base_fcf=100.0,
+        growth=0.05,
+        wacc=0.10,
+        terminal_growth=0.03,
+        projection_years=2,
+    )
+
+    result = _run_dcf(
+        fcf_series=fcf,
+        shares_outstanding=10.0,
+        wacc=0.10,
+        terminal_growth=0.03,
+        projection_years=2,
+    )
+
+    assert result["enterprise_value"] == pytest.approx(expected_enterprise_value)
+
+
+def test_run_dcf_terminal_growth_equals_wacc_is_error() -> None:
+    fcf = _fcf_series(100.0, 0.05)
+    result = _run_dcf(
+        fcf_series=fcf,
+        shares_outstanding=10.0,
+        wacc=0.10,
+        terminal_growth=0.10,
+        projection_years=5,
+    )
+    assert "error" in result
+    assert "Terminal growth" in result["error"]
+    assert "intrinsic_value_per_share" not in result
+
+
+def test_run_dcf_terminal_growth_above_wacc_is_error() -> None:
+    fcf = _fcf_series(100.0, 0.05)
+    result = _run_dcf(
+        fcf_series=fcf,
+        shares_outstanding=10.0,
+        wacc=0.10,
+        terminal_growth=0.11,
+        projection_years=5,
+    )
+    assert "error" in result
+    assert "Terminal growth" in result["error"]
+    assert "intrinsic_value_per_share" not in result
+
+
+def test_run_dcf_zero_wacc_is_error() -> None:
+    fcf = _fcf_series(100.0, 0.05)
+    result = _run_dcf(
+        fcf_series=fcf,
+        shares_outstanding=10.0,
+        wacc=0.0,
+        terminal_growth=0.03,
+        projection_years=5,
+    )
+    assert "error" in result
+    assert "WACC" in result["error"]
+    assert "intrinsic_value_per_share" not in result
+
+
+def test_run_dcf_negative_base_fcf_is_error() -> None:
+    """The most recent FCF is negative, making the DCF not meaningful."""
+    fcf = pd.Series([100.0, -50.0], index=pd.to_datetime(["2023-09-30", "2024-09-30"]))
+    result = _run_dcf(
+        fcf_series=fcf,
+        shares_outstanding=10.0,
+        wacc=0.10,
+        terminal_growth=0.03,
+        projection_years=5,
+    )
+    assert "error" in result
+    assert "negative" in result["error"].lower() or "zero" in result["error"].lower()
+    assert "intrinsic_value_per_share" not in result
+
+
+def test_run_dcf_zero_base_fcf_is_error() -> None:
+    fcf = pd.Series([100.0, 0.0], index=pd.to_datetime(["2023-09-30", "2024-09-30"]))
+    result = _run_dcf(
+        fcf_series=fcf,
+        shares_outstanding=10.0,
+        wacc=0.10,
+        terminal_growth=0.03,
+        projection_years=5,
+    )
+    assert "error" in result
+    assert "zero" in result["error"].lower()
+    assert "intrinsic_value_per_share" not in result
+
+
+def test_run_dcf_zero_shares_returns_empty() -> None:
+    fcf = _fcf_series(100.0, 0.05)
+    result = _run_dcf(
+        fcf_series=fcf,
+        shares_outstanding=0.0,
+        wacc=0.10,
+        terminal_growth=0.03,
+        projection_years=5,
+    )
+    assert result == {}
+
+
+def test_run_dcf_negative_shares_returns_empty() -> None:
+    fcf = _fcf_series(100.0, 0.05)
+    result = _run_dcf(
+        fcf_series=fcf,
+        shares_outstanding=-1.0,
+        wacc=0.10,
+        terminal_growth=0.03,
+        projection_years=5,
+    )
+    assert result == {}
+
+
+def test_run_dcf_insufficient_history_returns_empty() -> None:
+    fcf = pd.Series([100.0], index=pd.to_datetime(["2024-09-30"]))
+    result = _run_dcf(
+        fcf_series=fcf,
+        shares_outstanding=10.0,
+        wacc=0.10,
+        terminal_growth=0.03,
+        projection_years=5,
+    )
+    assert result == {}
-- 
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