I have read about DCF in Rosenbaum's book and the Vault guide but both seem to take the present net debt of a company when calculating equity value. What if the company is expecting to pay down its debt. Where would I fit this into the model seeing as the change in NWC calculation only includes current items and not long term debt etc..
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My guess:
You are calculating all future unlevered FCF of the company, then discounting them back (with WACC) to get to EV.
To find equity value you would then subtract the net debt, minority interest, preferred stock etc You are subtracting current net debt, because the EV is as of today's current value (we already discounted it back), and not future.
Perhaps what you could do, is project future net debt (which only makes things more difficult), then discount that amount back accordingly, then subtract it from EV. However that is completly unecessary and usless to do, when you are trying to figure out the value of the company as of today. If you were trying to figure out the future equity value of the company, then it might make sense.
I'm not sure if i'm right, someone correct me if i'm wrong...
keep in mind a DCF is most useful on a company with a stable capital structure and somewhat stable cash flows.
If you are looking for the equity value today, then NPV the UFCF and subtract current net debt.
if you are look at future value more than a couple years out just throw a multiple on the thing and be done with it
When you're doing a model you always factor down future debt (or, less commonly, project it up if mgmt is giving guidance it is funding via debt issuance), which is then reflected in interest expense. Less debt = less interest to be paid. So the model factors that in.
Interest expense is part of the FCF calculation: Net Income + (Interest Expense * 1-Tax)+ Depreciation - dNWC - CapEx
Net Income is directly effected by interest expense, so factoring debt up/down in your projections will change your FCFs.
Most i-bankers, from what I know, just use management guidance to determine whether or not to factor down debt, but, then again, I think that's the only way.
Build out your debt schedule (interest and principal payment, as well as amortization of premiums or discounts) on a separate tab. The schedule should have a breakdown of payment for each traunche of debt. Also build your CapEx and depreciation schedule on a separate tab (or on the bottom of your DCF, but a separate tab is easier to deal with personally)
The company gives you its interest rate on each traunch of debt, as well as that debt's maturity in its 10Q/10K, so you have all the info you need to build a debt schedule. As far as CapEx, you can get some guidance in the MD&A. If its a mature company, the concensus is just to mae CapEx = Depreciation. You can assume straight line depreciation, and use a mid point of the useful life range given in statements.
If you don't want to do that, then people generally assume a target capital structure (either based on that of the acquirer in an M&A situation, peers, or just the company's current capital structure.) Use that as its D/E ratio when calculating your WACC, and assume the value of the debt from your D/E calculation will be the same value (not the same ratio result) for your D/Enterprise Value.
Interest bearing debt doesn't fit into a DCF calculation anywhere. It is relevant once you find the present valcue of the FCFs calculated from your DCF to get the company's supposed "intrinsic" value (even though its not really intrinsic if you use comps to get a terminal value). After you find the present value of the FCFs, the sum of these gives you your enterprise value, and you have to take away net debt (interest bearing debt - cash), minority interest and preferred stock to get to your equity value.
Interest expense from that debt factor into FCF calculations though, no? So, you need to do the debt work (like you described) before you can even get to the Equity Value.
No. Free cash flows are unlevered, meaning they have not yet taken into account the effects of leverage (i.e. interest) on the firm's cash. They are the cash flows available to all stakeholders, both debt and equity, which is why they represent the value of the entire enterprise.
Also, the NWC calculation for a DCF does not include ANY financing items, so take out cash from current assets, and any interest bearing debt from current liabilities. Net working capital is only concerned with current assets or liabilities related to operations.
Working Capital = Current assets (CA) - Current Liabilities (CL) Net Working capital = (CA - cash) - (CL - interest bearing debt, including current portion of long term debt, commercial paper and short term borrowings)
Assume a new project. At Year 0 there will be equity and debt equal. From this Fixed assets will be purchased. Are the FCF's used in DCF before the Loan inflow and the loan repayments ? I assume the interest on the debt is included in the FCF used in the DCf calculation ?
The posts in this thread are completely unhelpful, largely wrong, and not answering your question..
You're present valuing the cash flows, so you need to use the present value of net debt to have an apples to apples comparison. You're saying that all those cash flows are worth X today, so you need to subtract a today value of Y (net debt) from it. It would be as meaningless otherwise to say that a company is worth X today and its debt is worth Y in 5 years, therefore it is worth X-Y today.
Quick DCF Question - Net Debt (Originally Posted: 03/07/2010)
My question is twofold. First, is net debt debt minus excess cash, or is it debt minus all cash & equivalents. Second, when calculating the WACC for a company, or when levering/unlevering betas, for "D" (debt), should you use debt from the balance sheet or net debt (as defined above, whichever is correct). Thanks in advance for help.
net debt is interest bearing debt minus excess cash, though all cash is used as excess cash many times....where i am at, we use balance sheet debt to calculate d/e ratios and to unlever betas....wonder if market values of debt would be better...
Market values are more appropriate when working with distressed valuation. With healthier companies, even if debt is trading below par, it is assumed that debt will be paid out in full, so you'd assume book value of debt in this case.
net debt:
use excess cash and equivalents. That means you take cash and add to that cash equivalents, which are short term securities that you can liquidate right away. You also have to take away minimum cash requirement (some companies have working capital cash requirement for example) to get to the excess cash and equivalent.
wacc:
both net debt/debt is ok. just be consistent when you do it. e.g. use net debt for all companies or debt for all companies in the beta calculation.
This can get tricky when you have a company with unusual cash situation, microsoft for example. in which case gross debt is probably better.
Net Debt & CAPEX (Originally Posted: 12/13/2014)
Hi everyone,
I'm struggling with a "valuation" question, concerning the debt ratio (NET DEBT/EBITDA). Let's assume There's 500 of debt, 300 of EBITDA, and 50 of CAPEX ... do you add the CAPEX to the net debt to get the "real" or "final" net debt (the right one), or do you substract it?? and why??
thank you in advance!
unlevered fcf = (ebitda - capex) fcf = (ebitda - capex - intex) Leverage = debt/ebitda UFCF Mult = debt/UFCF FCF Yield = FCF/Equity
You can net out taxes for ufcf too: (ebitda - capex - taxes)
or you can net out WC changes: (ebitda - capex - taxes - delta NWC)
If youre in school, i wouldnt worry about the differences between these. Just use the formula your teacher wants you to use.
I'm sorry but I don't see how this answers my question ... what am I missing here ?
Don't forget to add back cash to the gross debt number. Also you shouldn't have to touch capex to find debt.
If debt = 500, cash = 100, Net debt = 400
You wouldn't add capex to net debt. You could take EBITDA less capex to get a better cash EBITDA figure. Then take debt divided by that number to get leverage.
Fastest way to calculate Net Debt in valuation? (Originally Posted: 07/02/2009)
Hi guys,
If you are doing comparables analysis of listed companies, what's the quickest way to calculate (or to find..) net debt? Do you happen to know websites which show the companies net debt? I can't find it..
And if you are calculating it directly, how much time do you spend on calculating it?
Looking forward to your feedback!
Thanks
Mike
We dont use Factset or CapIQ so I cant tell you if they calc a net debt number for you (damn lazy bankers) but I do everything quick and dirty (ask your sister) so i just do ST debt + LT debt - cash & cash equiv
LOL.
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