How to build DCF for financial company?

I'm trying to build a DCF for a financial company, but am a bit confused about how to come up with FCF and WACC because a large portion of the company's income is from interest (i.e. the company borrows a substantial amount of money (e.g. through customer deposits) and lends this out at a higher interest rate).

In this case it doesn't seem to make sense to use FCF that equals EBIT(1-t)+D&A-capex-change in working capital, because this excludes the huge amount of interest income.

Also, for determining WACC, what should I use as the cost of debt (the rate on deposits it pays customers, or just the rate it pays on its bonds)?

Any ideas would be very much appreciated.

Comments (5)

Jul 26, 2009

Thank you for the info... from that source it looks like I'll just try to discount dividends at the cost of equity.

Does anyone think this is incorrect?

Jul 26, 2009

Are you actually doing this for work? If so whoever is meant to be guiding you must really suck.

Yes you discount dividends at the cost of equity and that's it.

Jul 26, 2009

he works for lehman

Jul 27, 2009