I have a few specific questions regarding the various inputs that go into calculating FCF for DCF model.

Non cash charges: So, from what I know, deferred liability, if it is expected to continue to increase (not reverse) then you add deferred liability to NI, and vice versa for def asset.

But can anyone tell me the logic behind this, and maybe explain the def tax concept. I don't seem to be getting it.

change in net working capital is change in CA (excluding cash&equivalents) - CL (excluding any debt)

Can any one tell me the logic behind why cash, and debt are not included as part of the NWC?

Also, why are amortorization of bond discount added back to NI, and accretion of bond premium subtracted from NI? I thought unrealized gain in bonds are not reflected in the NI. Aren't bonds just stated on BS at their par value?

Any constructive input would be appreciated.

Comments (2)


For the NWC question, I believe it has to do with what actually NWC entails, and with the equation you have it is Operating Work Capital. It is the necessary amount of operating working capital that is needed to run the business. It is more of a measure of the operating efficiency of the business rather than it financing means, capital structure etc. It is basically a measure of how well the company is doing its business regardless of the financing. Which is why you take out the cash and debt.

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