How to incorporate NOL into your DCF calculation?
Is it reasonable to just add it to the derived EV, or does it make sense to actually use NOL to offset EBIT in the DCF?
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One way would be to value the NOLs using applicable discount rates, allowable limits, etc. to arrive at a DTA value, and then factor that in.
Another way would be to actually forecast NOL effect on FCF (don't forget to apply taxes), and then sum those into perpetuity using appropriate discount rate as well as exit multiple method. Then you add to the initial FCF to adjust.
The way I have done it is calculate the two EVs separately, and just add the discounted NOL value to your DCF-derived value. I just link the financials in the model to both the DCF and NOL cash flows so that numbers are kept consistent. I think you could also do it the other way but it is probably more complicated in terms of assumptions.
In my M&A group, we used to do the former.
And you didn't discount the NOLs? especially if the company is not profitable in the next year or so?
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