real cash expenses NOT reflected in DCF...possible?

Say somehow you know a company will be pursuing an aggressive acquisition policy going forward with its cash balances, or will be purchasing a lot of marketable securities with its cash in the future.

Both of these represent investing cash flows, but it's not reflected in FCF since they are not capex. So how would you account for it in a DCF?

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Comments (3)

Jan 16, 2011 - 10:53pm

both of the examples you gave do not affect the firm value, so you do not account for them when doing a dcf. dcf is done by simply discounting the fcf of the unlevered firm to arrive at a firm value. in the examples you gave, the firm produces fcf; how those cash flows are spent is irrelevant. when computing firm value, all that matters is the quantity of fcf generated.

the only reason to include cash expenses in your dcf is if those cash expenses would be needed to generate the revenues you are modeling. if they are discretionary then you do not need to include them

Jan 19, 2011 - 3:16am

I'm confused. How does that not affect the amount of cash available for distro to capital providers? If each year, you KNOW the company will need to use its cash to buy a new operating subsidiary or other investments.....doesn't that mean less cash flow to equity?

Best Response
Jan 19, 2011 - 4:39am

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