Small DCF Question about Valuing Fourth Quarter Cash Flows
I'm building a DCF to value a company whose fiscal year ends December 31st. What is the industry accepted way of valuing the remaining year? Should I make a separate column for "Remaining 2013", come up with a free cash flow, and then use n=.25 to discount it? Should I use n=.125? Or should I come up with a free cash flow for 2013 and pretend that none of it has been realized, therefore discounting it at .5 (for the half year convention. I'm leaning towards the first option I mentioned but I have a feeling its not right.
Good question....I had to build a model a few weeks ago and just used analyst numbers for rest of FY13 and went into 2014 because I didn't have time to mess around with trying to figure this out.
Also very interested, would like to know what is generally used in the industry.
You definitely should not be going back to the beginning of 2013. That's retarded. I would get fired if I valued a company based on its past cash flows.
.25 for September or .125 for now
I am not sure if there is an "industry norm" but any DCF I have built includes some kind of transaction date assumption. Remember that the thesis of a DCF is that you can value a company based on its future cash flows. It doesn't take much additional thought to realize that any prior cash flows should not contribute to the company's valuation.
By date assumption I am basically stating you need to assume some kind of starting point to determine when to start projecting cash flows and your base period for discounting.
Say for instance you assume this company is sold/acquired at the end of CY Q3. You would project out cash flows starting after 9/31/13. With normal discount rate, you would have 0.25 for year 1, 1.25 for year 2, and so on. If you use the mid-year convention, you would have 0.125 for year 1, 0.75 for year 2, 1.75 for year 3, and so on. If you assume the company is sold/acquired at the very end of the year, you would simply start cash flow projections in 2014 and wouldn't have a stub period for discounting.
Hopefully this makes sense.
model out the entire 2012 year (all 2012 CF's) Then use a 'stub-year' fraction (.25 for 1 quarter) Then multiply 2012 CF by stub year. If you are using mid-year conventions to discount all cash flows, then yes it would be 2012CF / (1+WACC)^(.125). Then the next year would be (1+WACC)(1.125)
I wouldn't discount the final qtr at all (e.g. n=0). We're technically already halfway thru that quarter anyhow. It shouldn't make a material difference in the valuation. Just add 0.25 x 2013 FCF (assuming no huge seasonality). Then discount 14 at 0.5 , 15 at 1.5 etc.
Also curious about this, because I am modeling a company that will probably be sold in Q4 of this year. Should I project the 4th quarter and add that into my valuation? Or should I skip ahead to 2015? I only have data up to Q2 of this year (Q3 has not been released yet), so I could take the half-year data and multiply it by two to finish out the year. Does that sound right or is there any other industry norm?
edit
What GreekRX said is what I am also familiar with. You definitely can't just skip a whole quarter. The easiest way to do this is to take analyst projections for the final quarter, and then discount them as .25 of a year (not using mid-year convention).
You never want to include past cash flows, but also want to include all future cash flows you can project, as that is the essence of a DCF.
Accusamus consectetur temporibus fuga labore. Tempora velit quo impedit pariatur quasi debitis quos. Repellat reiciendis vero at omnis ipsum tenetur aut. Accusamus nemo enim et vel et.
Ex est exercitationem officia aut dolorem sunt. Quisquam et veniam cum eos sed eos. Illum fugit et dolore magni aliquam rerum. Fuga sunt minima nisi repellendus nisi suscipit. Ut suscipit quo eum ducimus est. Laborum iure sapiente impedit sit ut neque placeat.
Minus quia laboriosam quisquam neque et. Labore eos quae debitis sunt. Fuga et assumenda qui libero necessitatibus aliquid non. Impedit veniam eveniet recusandae quae pariatur sed accusantium.
Excepturi rerum voluptatem debitis deleniti libero provident sed. Quas ut rerum totam qui modi. Non quod corrupti repellat provident qui magnam quia dolor. Consequuntur rerum vitae explicabo quo omnis voluptatem.
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...