DCF Question (basic)
when building a DCF and calculating unlevered fcf are you supposed to add back every non cash and non recurring expenses? or are you only expected to add back d&a and subtract capex and the change in nwc
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Answer to this type of question is always: it depends. You need to assess how much accuracy (and the other edge of the sword, false precision) is needed in the model. Theoretically yes, you add back everything that is non-cash and non-recurring. Sometimes, however, you might just want to take EBITDA less Capex (and NWC if meaningful) and value it on that basis because you simply don't need that level of granularity.
thanks for the response I appreciate it. so when a company provides their own ebitda and adjusted ebitda (adding back things like SBC in adj ebitda) which one should you treat as ebitda for the exit multiple? and if they do add back SBC should your unlevered fcf add back SBC and other add backs from the adj ebitda that the company provides?
You need to use your discretion for that. Companies love to adjust their EBITDAs and it is useful in certain instances but in others they are clearly just trying to lock a certain valuation.
You add back SBC and you do everything on an projected FDSO basis or you don’t and then you do everything on a current FDSO basis. No matter what, you need to capture the dilution caused by SBC.
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