quick DCF questions...
Hey everyone, first post here
2 questions, 1st for DCF we discount future year cashflow and add terminal value to get EV and from there we add/subtract stuff to get our implied equity value and share price..
but what about the current year free cash flow? why isnt that included in our calculation?
2nd question whats the rational behind change in working capital? when calculating FCF, we use the 'operating working capital' so what we have is CA-CL (which excludes cash/short term equivalents and short term debt) what is this value we get? and what does it mean if there is an increase in NWC YoY or decrease in NWC YoY? and why do we have to subtract that to calculate our cashflow??
thanks!!
you cant discount a current cash flow.
∆ in working capital is adjusting for noncash items hence fcf
google is your friend
For question 1, I think you are accounting for the current year's cash flow. I'm pretty sure convention is to assume that all the cash flows you receive over the course of the year happen all at once at the end of the year. I imagine this became a standard for the purposes of being conservative (in corporate finance roles, NPV is the equivalent of a DCF. You wouldn't want to get a artificially high NPV).
For question 2, your "free cash" changes when your working capital changes, as oldmansacks said. Imagine you buy a company and think you reduce the amount of money regularly tied up in A/R. You then have more free cash.
thanks for your answers, and for question 1, i understand u cant discount t=0, but why do we not use the FCF in our DCF calculation? (without discounting the current year cash flow) thats what im asking.. and yeah i tried googling but i couldnt find out why...
My belief is that you already are. Say you buy a company on Jan 1, 2012. The company makes $1,000 a day for every day in 2012, including Jan 1. In your DCF you're going to list that as a $365,000 cash flow on Jan 1, 2013
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