Change in NWC in Terminal Value

What exactly are you talking about? Terminal Value in a DCF? You project out FCF in the first 5 or so years, and also calculate the changes in NWC using DSO, DPO etc. for the assets/liabilities being analyzed.

So, NWC is really only in effect for those projection, or growth, years. For TV, you are not projecting out NWC since you are simply just applying a perpetuity growth rate to your terminal year, or using an Exit multiple from a comps list to get your TV. So basically, NWC is assumed to stay constant during the steady-growth period. I am not sure what you are talking about saying how you dont include D&A and Capex? You may have to elaborate. It is already factored in the TV calculation due to the applied growth rate or multiple from your terminal year, in which NWC, D&A, CapEx etc. is already projected and calculated.

I may have misunderstood your question completely, so I apologize if that is the case. Please elaborate on what you are looking for.

You will still need additions to net working capital in the terminal year, so it should be included (or removed) in the calculation of cash flow in the terminal year. You are right, D&A and capital expenditures will zero out, or capex will be slightly higher than depreciation. Be sure to include depreciation in the operating income calculaton though.

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valuationGURU

You will still need additions to net working capital in the terminal year, so it should be included (or removed) in the calculation of cash flow in the terminal year. You are right, D&A and capital expenditures will zero out, or capex will be slightly higher than depreciation. Be sure to include depreciation in the operating income calculaton though.

Thanks for your answer.

Could you please explain to me why we include change in NWC.

I don't understand why we do not include capex and D&A but include NWC - for me the reason not to include capex and D&A is the same as why we should not include change in NWC (in the long-run change in NWC should be zero)

Thank, Chris

N96k2q2NVy valuationGURU:

You will still need additions to net working capital in the terminal year, so it should be included (or removed) in the calculation of cash flow in the terminal year. You are right, D&A and capital expenditures will zero out, or capex will be slightly higher than depreciation. Be sure to include depreciation in the operating income calculaton though.

Thanks for your answer.

Could you please explain to me why we include change in NWC.

I don't understand why we do not include capex and D&A but include NWC - for me the reason not to include capex and D&A is the same as why we should not include change in NWC (in the long-run change in NWC should be zero)

Thank,
Chris

I am baffled by what you are asking here. Terminal value is a simple calculation using the last year's FCF (Gordon Growth) or EBITDA (multiple method). That final year includes adjustments to NWC, D&A and CapEx if you are using the Gordon Growth method since you are using unlevered FCF.

peinvestor2012 N96k2q2NVy:valuationGURU:

You will still need additions to net working capital in the terminal year, so it should be included (or removed) in the calculation of cash flow in the terminal year. You are right, D&A and capital expenditures will zero out, or capex will be slightly higher than depreciation. Be sure to include depreciation in the operating income calculaton though.

Thanks for your answer.

Could you please explain to me why we include change in NWC.

I don't understand why we do not include capex and D&A but include NWC - for me the reason not to include capex and D&A is the same as why we should not include change in NWC (in the long-run change in NWC should be zero)

Thank,
Chris

I am baffled by what you are asking here. Terminal value is a simple calculation using the last year's FCF (Gordon Growth) or EBITDA (multiple method). That final year includes adjustments to NWC, D&A and CapEx if you are using the Gordon Growth method since you are using unlevered FCF.

That's not true, TV using the Gordon does not include D&A and Capex (or they zero out) and my question is why it includes change in NWC.

Thanks, Chris

N96k2q2NVy

That's not true, TV using the Gordon does not include D&A and Capex (or they zero out) and my question is why it includes change in NWC.

Thanks,
Chris

You are doing it wrong then.

Year N's UFCF*(1+g)/(r-g)

The last year's UFCF already accounts for the changes in CapEx, D&A and NWC. Again, the terminal value does not incorporate any of those changes beyond the last period's UFCF you are using.

peinvestor2012 N96k2q2NVy:

That's not true, TV using the Gordon does not include D&A and Capex (or they zero out) and my question is why it includes change in NWC.

Thanks,
Chris

You are doing it wrong then.

Year N's UFCF*(1+g)/(r-g)

The last year's UFCF already accounts for the changes in CapEx, D&A and NWC. Again, the terminal value does not incorporate any of those changes beyond the last period's UFCF you are using.

Look,

When you are building a dcf, you project your UFCF for let's say 5 years and then add a colum let's call it stable - the "stable" UFCF is used to determain the TV.

"Stable" UFCF does not include Capex and D&A because in the long-run capex = D&A but you do include change NWC.

My question is why do you substrate change in NWC in determaining the "stabel" UFCF - because as I see it in the long run change in NWC should be zero ?

I don't need a lesson in what I am doing wrong because I am not doing anything wrong...

valuationGURU

The change in future revenue would require a change in net working capital. You aren't projecting flat revenue going forward.

Thanks for your answer!

But I just cannot wrap my head around it.

You are saying because I have positive growth in the future I need to subtract change in NWC - with growth usually comes an increase in change in NWC - right?

But I don't quite get the long-term connection to TV

Especially in contract to capex = D&A.

Thanks, Chris

If I could attach a model I would to show it. If anyone is confused and cares to see PM me.

Also, the reason you would show it with a terminal year is if your final discrete period year is not on a normalized level.

I'm over trying to help the arrogant OP. If he can't even figure out a DCF, he has no chance with an LBO.

you do realize that the impact of this on your actual valuation is negligible right? otherwise, your terminal value is too big a portion of your dcf.

yes but what if wokring capital increases year by year?