DCF

Revision Questions
• What is intrinsic value?
• What all inputs we need to calculate a firm value using DCF approach?
• When do we use DDM?
• What are FCFs?
• Why CFO, Net Income, EBIT, EBITDA are not free cash flow?
• Which is better FCFE or FCFF
• Theoretically should yield same estimates
• FCFE if capital structure is relatively stable
• FCFF if
• A levered company with negative FCFE
• A levered company with changing capital structure
• How do we calculate terminal value?
Question
• The terminal value in a capital budgeting project is generally much
lower than the initial investment. The terminal price in a stock
valuation is generally much higher than the initial investment. How
would you explain the difference?
Forecasting Free Cash Flows

• Computing FCFF from NI

• FCFF = NI + Net NCC + [Int(1 – Tax rate) ] – Inv(FC) – Inv(WC)
• Why after-tax interest paid is used?
• What kind of investments should be considered in Fixed Capital?
• Only net cash investments and acquisitions should be considered
• What all to consider in Working capital?
• In working capital for cash flow and valuation purpose cash, notes
payable and current portion of long-term debt are excluded.
Non Cash Charges
• Where to find them?
• What are non cash charges?
• Depreciation
• Amortisation
• Impairment
• Deferred taxes
• Restructuring charges that are non cash in nature
• Stock Options
Forecasting Free Cash Flows
• Computing FCFF from CFO
• FCFF = CFO + [Int(1 – Tax rate) ] – Inv(FC)
• Why investment in working capital and depreciation are not included
in above equation?
Forecasting Free Cash Flows
• Computing FCFF from EBIT or EBITDA
• FCFF =[EBIT X (1-T)] + Dep– Inv(FC) – Inv(WC)
• FCFF =[EBITDA X (1-T)] + Dep X T – Inv(FC) – Inv(WC)
Computing FCFE from FCFF
• FCFE = FCFF -[I X (1-T)] + Net Borrowing