Why can you not use DCF for a bank?
Why would unlevered FCF in a DCF not be an appropriate way to value a bank? I have seen this thread posted before and have seen the guide answers, but have not gotten a satisfying answer.
Unlevered FCF = Revenue - COGS - Operating Expenses - Taxes + Depreciation - increases in NWC - CapEX
At what specific point in the above formula would your unlevered FCF be misleading as a valuation metric for a bank or other financial institution?
how does a bank make money? think about what goes into EBIT... moreso, what doesn’t go into EBIT. interest is a source of a revenue for banks.
Okay, that makes sense. What about a levered DCF, though? Wouldn't levered cash flows incldue the interest expense/interest income of banks?
The source of their revenues are deposits, which are interest bearing debt but in reality represent to the banks what raw materials represent to a manufacturer.
Using that as a jumping off point, it's not practical to run a DCF because it's not readily discernible what CFs are available to equity holders, debt holders, or both. This is why DDMs are the closest thing to a DCF that gets run for FIs, because those CFs are actually discernibly available to equity holders.
https://www.wallstreetoasis.com/forums/why-would-you-not-use-a-dcf-for-…
this thread has a fairly thorough explanation
I mean you use a DDM which is basically... discounting cash flows so you do use a dcf you just call it something else bc the set up is diff.
Quis molestias molestiae non labore neque magnam. Quibusdam qui facere commodi nulla. Quam qui soluta ea et quia sit quis. Et provident dolore qui asperiores sit.
Consequatur nostrum dolore incidunt totam reprehenderit. In unde fuga et temporibus dolor vel ex. Ut possimus aperiam qui ullam sed iste. Quaerat maxime aperiam nostrum animi dolorum. Accusamus magni doloremque eligendi debitis est. Dolore voluptatem nemo est eos. Fugit suscipit error ut repellat reiciendis ducimus ut.
Eius deserunt quae ut. Nisi et consequatur ipsam assumenda et. Ut pariatur quam aut quisquam ut.
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...