Just crossed across this issue. I get how the DCF is done for the unlevered metric, but I have doubts about the levered - suddenly, it seems weird to me. Do I calculate the terminal value or do I get it just by bringing the cash flows to pv?
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Yes, if you're performing a DCF for a set of levered free cash flows, you're doing exactly the same thing except on a levered basis.
The reason why you have a terminal cash flow is to build in the assumption that the company is going to be a going concern to perpetuity since you don't know its operating life. If you're valuing a project with a limited life, this would not be a concept that you involve.
How would be the TV Calculation?
Exactly the same as you would do for FCFF for the Gordon Growth model. For terminal multiple method, you would use a metric representative of levered earnings like net income instead of EBITDA like you normally would in an unlevered situation.
how can it make sense if for the TV for the FCFF you are using the WACC? analyst at my group told me to
1) Take the value of the TV 2) Subtract debt out of it 3) Discount it to PV using cost of equity (i.e TV/(1+re)^n)
would this be okay?
Your TV wouldn't be calculated with the WACC but with the cost of equity instead, since you're looking at everything on a levered basis.
Not too sure what the mechanism is behind what your analyst told you, but it doesn't sound right.
bump
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