DCF Valuation Method

noplat is basically ebit*(1-t)

From my understanding NOPLAT is similar to NPAT(ebit*(1-t) however it also makes a bunch of adjustments to taxes. However what I dont understand is what is the advantage of calculating FCF based on second method given the extra complexities in determining NOPLAT and net investments. Surely it must yield some extra sort of insight that is not avaliable from the traditional method we use.

eviloctal

From my understanding NOPLAT is similar to NPAT(ebit*(1-t) however it also makes a bunch of adjustments to taxes. However what I dont understand is what is the advantage of calculating FCF based on second method given the extra complexities in determining NOPLAT and net investments. Surely it must yield some extra sort of insight that is not avaliable from the traditional method we use.

Perhaps it provides a more refined output (FCF) the more detail you dig into for taxes? Is it worth the extra time/hassle? Probably not.

It is essentially the same thing as the poster above stated. Never used anything other than EBIT/Op Inc.

yes because they represent a "fair" return for their risk...

... i think. That's what I remember from Damodaran's Investment Valuation. You should check out his website; he basically puts everything he knows on there so you don't have to buy any of his books.

http://pages.stern.nyu.edu/~adamodar/

I think you can also think of it this way: assume the market accurately prices the marketable securities (ie their worth is the present value of their future cash flows). Then save yourself the time and the trouble by valuing the firm w/o the securities income and then adding the value of the securities on to the DCF

thanks

In practice... investment bankers use equity research reports to tell them what growth rate assumptions to use.

In theory... you'd use historical rates (assuming they're still relevant) and adjust for macroeconomic events, the stage the company's in (growth, mature, etc.), growth/fall in demand, etc.

you grow revs at whatever your MD tells you to grow them at to derive the highest valuation

Thank you.

For the interest expense, you look up the debt schedule and see how it is being paid off every year (which affects the projection of Liabilities in the BS). Then for every remaining debt tranche, however large or small it is, each year you take the interest expense. These interest expenses for all the tranches then are added up and appear on the IS.

To sum up: In order to project the interest expense, you need to have an idea of how the debt is being paid off and how much of it will be remaining each year. For the remaining debt (and different tranches of it) each year you take the interest expense.

A/R and A/P you can project from the % of say, sales, that they represent in the last year with actual data (not projected,) given that it didn't change much from the previous years.

Good luck.

Intrinsic Value tends to be derived from a DCF. Relative would be comparables, like P/E, P/B or EV/EBITDA.

Is the question: are the above weightings correct for a valuation?

I'm not in equity research but for I Banking, (FIG) I typically use 50 - 60% for (DCF, Residual Income, and sometimes DDM),
20-25% for comps and 20-25% weighting for precedent transactions.

Hope that helps

yup, so u take a set of comparable companies similar to that division and get the min, max, median ebitda multiples

then take the ebitda for your division and multiply it to those multiples. that should give u the EV of your company.

at the risk of being harpooned by the NY BB intelligencia, when I advise clients on potential corporate transactions (MM M&A) we base DCF on EBITDA to try to gauge the available free cash flow to support debt, as well as to aid in comparing multiple targets. as part of this, we evaluate various target alternatives on a pre-tax basis because the applicable tax rate is dependent on numerous factors, many of which can be manipulated during the transaction and structuring. for example, if the target is a "S" corp or a LLC (and you elect either partnership treatment or disregarded entity status with the IRS - and yes, I know you don't "elect" to be a disregarded entity), you could very well have "pass through" tax whereby the applicable tax rate is dependent on the circumstances of the owner. alternatively, in a "C" corp setting, between NOLs, 338 elections and special depreciation provisions in the IRC ("bonus" and 179 depreciation) the tax implications vary widely between each target under analysis. therefore, in order to compare each option on a "apples to apples" basis, we ignore the tax side during the DCF analysis (and then adjust as appropriate on the back end when evaluating transaction value, which can change radically if stock/assets/368 reorg's).

Also has to do with where these transactions take place. Lots of Nat Res / MM transactions are cross border - tons of legal crap go into it. Best to do it clean and readjust later as reformedatty explained

You might want to consider writing your masters dissertation on something more original...

It's called a market implied discount rate.

Unless you can tell the future, you don't have access to the correct rates and information to get a perfect valuation to compare the market with

That's an impossible question to answer. Everything is about your inputs on the DCF (along with every other type of model you use), hence why so many different analysts and firms have different recommendations and price targets on the same company. The market price is generally going to be different than any model you use which is how you would determine whether or not you believe the market is over/under valuing.

Are you doing your valuation based on the DCF when u calculate ur IRR?

There is nothing wrong with that. NPV should be calculated as pv of return AFTER subtracting initial investments, and thus NPV less than equity investment signifies nothing. The fact that NPV is positive and equity IRR is positive is logical - whether those numbers are correct will depend on your model, but conceptually, there is nothing wrong.

As for FCFE and FCFF, yes they should be the same if there has been / will not be any debt. However, even with projections, you may want to make assumptions as to their future capital structure to capture potential tax shields.

NPV should be the same in a FCFF and FCFE situation as well, though. Not sure if this is what you were asking, but:

Sum of FCFF/Cost of Capital

should be equal to:

Sum of FCFE/Cost of Equity

That's pure theory base. Plenty of reasons (some from the accounting statements) as to why this doesn't work out in practice.

Yes. You can lower the terminal multiple and/or increase the cost of capital.

lol at gaming a DCF to fit somebody else's valuation

As @peinvestor2012 suggested, you can raise the WACC or lower the exit multiple. another good, but less obvious/direct way would be to increase working capital demands. I.e., take longer to collect receivables and pay AP sooner.

This change will impact your delta in NWC and change your ULFC on a DCF.

dcf all day errday

I personally enjoy an arbitrary risk premium for something like customer concentration, regulatory risk, etc.

This is retarded - there are tons of ways to mess with it but if you're too lazy just change the WACC. If that's hard, change the terminal growth rate. If that's hard then just change the forecasts haha