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?
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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.
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