So i totally understand the concept of FCF and how it is used in a DCF but don't quite understand how it is usually projected out for whatever the length of the projection period. Is each component of FCF (ie. D+A, CAPEX, NWC) projected out to get FCF for each year or is FCF found for the first year and then assumed to grow at a certain rate?
Thanks some clarification on this would be great.
| +335 | Return Rates For Interns Are Falling? | 142 | 1h |
| +152 | Article: Why UBS's Asian M&A bankers are thriving and UBS's American M&A bankers are not | 17 | 8h |
| +145 | Evercore > Goldman and I don’t think it’s particularly close anymore | 56 | 1h |
| +124 | I am a drunk MD AMA | 40 | 1d |
| +86 | UBS Offer Day | 30 | 23h |
| +75 | Santander IB? | 10 | 3d |
| +68 | I hate Wells Fargo | 19 | 7h |
| +51 | No return offer - feeling like a failure is an understatement | 20 | 2h |
| +45 | How cooked am I as an incoming WF IB SA 2027? | 17 | 1h |
| +43 | WF Return offers | 28 | 2d |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
How long is a piece of string?
Theoretically, the more analysis you perform and the more in-depth the model, the more accurate your projections (and, more importantly, more easily defended). At either end of the spectrum:
You could just grow FCF, but this is pretty shoddy "analysis".
You could build a 100 tab operating model behind a full 3 statement model.
In practice it's usually somewhere in between, depending on your goals, audience and timeframe. And, frustratingly, the 2 extremes above usually spit out similar answers...
You'll project each component (EBIT, D&A, Capex, NWC). You can get pretty granular for things like working capital by projecting out each component (AR, AP, inventory, accrued exp, etc.). I would look at the growth in FCF as a sanity check after doing that level of detailed analysis.
The above two posters are correct. On a side note, if you are using the Gordon Growth model to calculate the terminal value you usually assume a certain growth rate. Conversely, you could use a multiple to find the terminal value at the end of your projected forecast.
Thanks everyone, makes more sense now
I seriously doubt you really understand a DCF if you are asking this question.
Hey, douchebag, I do in fact understand a DCF model quite well. Please explain how this question about two ways of projecting out FCF (one of which is actually the method USED) makes you think that?
Because your method totally defeats the purpose of building a model in the first place...
And in what way.... Did you read my first post even? I suggested two methods that could be used, not one, and the above comments confirmed it can be done both ways but usually done by projecting out each component. Please explain yourself I want to know if I'm thinking about something incorrectly.
jesus you're a sassy "douchebag."
If you're going to stick a constant growth rate to Y1's FCF and project out the TEV that way, you might as well just do a multiples valuation using an implied growth rate.
the fact that you didn't realize this and suggested this as a DCF projection methodology rather than projecting out each year/line item shows you don't understand the DCF.
You understand that DCF's are when you calculate the TEV using the PV of future cashflows, that's about it.
One suggestion - you can take the company's return on newly invested capital (RONIC) and apply that to forecast capex to determine the additional return generated by growth capex. That's more appropriate for a steady state business than a growth equity story.
I see
why use FCF in a dcf (Originally Posted: 11/23/2017)
Hi all,
Can someone help explain the reasons why we use unlevered free cash flow.
from my understanding - we use unlevered because it is before debt holders are paid and we want it to be attributable to all owners both equity and debt because we want to show the cash flow from all financing sources
and we use "free" cash flow because we want it the excess cash on what is needed to fund the operations because we will use this cash to repay debt used for the acquisition and to determine profitability?
not sure if my understanding is right but if someone can explain why we 1) use "unlevered" and why we 2) use "free" cash flow for a dcf analysis
Thank you
Dicta aliquid eos iste eos ullam. Quia officia dolorum odit ipsa a reiciendis officia. Tempora qui eos illum cum. Voluptatem sint asperiores nesciunt suscipit qui et facere impedit.
Corrupti veniam et et fuga. Porro deserunt et consequatur est itaque sint. Corrupti reprehenderit ipsam voluptate dolorem earum ratione. Exercitationem exercitationem neque eius.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...