Discounted cash flow (DCF)Subscribe
Hello everybody, I cannot understand 2 questions so far invaluation:
1) Why cash which is standing on ais not included in valuation? We calculate only enterpice value calculating FFCF, but ignore the cash which is outstanding in the firm at the moment. If the company at the moment has a great amount of cash, the DCF method ignore such fact and in my opinion get lower company value than it should be. In my opinion, we should add outstanding cash to discounted FFCF of the company to get the enterpice value today, isn't it?
2) Why should we substract changes in net working capital from FFCF? For example, NWC was 100 in year1 and NWC decreased to 70 due to decrease of A/R, enything else being constant. So we get -30 NWC which is substracted from FFCF, which in our case mean that we add 30 to FFCF. However, I do not understand, how decrease in A/R increases my FFCF?