Hi all, I have some questions on an undying topic that's continuously discussed on the street: how tax rate affects EV valuation of companies. Some people argue it's positively correlated to EV while others argue it's the opposite. Based on my experience/observation, I think it's positively correlated especially when using unlevered DCF and simple EV formula. In the former case, increase in tax rate decreases WACC (EV goes up). And also in the latter case, cash and cash equivs go up as tax rate goes down (EV goes down). I heard some people saying it depends on valuation methodologies, so I

08 Sep 2016

I was recently in an interview and asked to calculate the PF free cash flow in the following scenario. The acquisition given was a company that had $40mm of EBIT, $10mm of D&A, $10mm of Capex, Change in Working Capital was assumed to be $0 and the tax rate was 40.0%. The debt to finance the transaction would be 100% bank debt given the size and would be split between Term Loan A and Term Loan B.

11 Oct 2008

So, I'm having trouble understanding a concept, and I thought maybe someone can help me out. It has to deal with unlevered/levered FCF. So here it is: So, from what I understand, when it says unlevered FCF, it means stripped of debt. And when its levered, it takes into account the capital structure of the company & includes debt. Now, when projecting FCF, (EBIT(1-T) + D&A - CapEx - NWC)), why does this give you Unlevered FCF? Is it because it's before interest and doesn't take into account debt?

17 Oct 2011

Hey there, I think I'm missing something basic here. I'm familiar with deriving a price target for a stock based on things like EBITDA multiples, but I've seen people say things like "At $N EBITDA and a X% fcf yield, the implied price is $Y/sh for a Z% upside." What is the math there for deriving a price target based on the fcf yield?

02 May 2018

Peeps - desperately looking for some quick guidance on doing an lbo model for a leasing company (they buy ships via capital leases then lease them out to travel companies). Do I include the interest they pay on the capital leases in the FCF before (or after??). I.e. FCF will be net of the interest payments on the capital leases and this resulting FCF will form the basis of the FCF used to calculate debt capacity/purchase price for an LBO valuation. Any thoughts?

29 Feb 2012

Quick question, and I'm probably missing something stupid here, but I'm working through an example LBO that a friend sent me from one of his MBA courses. Values are as follows: EBITDA - 190 D&A - 30 EBIT - 160 CapEx - 29 Change NWC- -40 The model template calculates FCF like this: EBITDA - CapEx - Change NWC - Taxes; which gives 190 - 29 - 40 - 36 = 85. Then it subtracts interest of 69 to give cash available of 15. This gives a different answer than the "standard" formula from interview guides of EBIT(1-t) + D&A - Change NWC - CapEx; 160 (1-.4) +30 - 40 - 29 = 57. What's the best way to think about this? Thanks.

24 Feb 2015

Hi everyone: This might be a dumb question, but I'm stuck on it and would really appreciate your help. I'm reading both Breaking Into Wall Street and WSO PE guide, and it seems that they have two formula for FCF calculation that don't 100% tie up. I wanted to check if I misunderstood them... From BIWS: FCF = CFO - capex From WSO PE guide: FCF = EBIT (1- tax rate) + D&A+ net change in working capital - capex If these two would be the same, then CFO would need to equal EBIT (1-tax rate) + D&A + net change in working capital. BUT, my understanding is that CFO = net income + D&A + net change in

06 Feb 2019

Hi! I'm trying to value a holding company that owns 3 projects, one of which has amortizing debt (changing leverage) for acquisition purposes. I'm fine with valuing the firm as a whole using FCFF and assuming it will be refinanced to a target D/E, but my questions are as follows: 1.- If I were to value the equity directly using FCFEs, how would I treat the terminal value (since the project is sold at an EBIT multiple after X years)? I'm guessing it's not going to be the same terminal value that I'm using for the firm as a whole, since there's debt. 2.- Again with the FCFE, since I'm

21 Jan 2017

I'm building a DCF model. How do I calculate tax expense when Operating Income (EBIT) is negative to get to FCFs? Net Operating Loss Carry Forward [quote "dosk17 - Retired Investment Banker"]Basically here is what you do: As the posters said above, if you have negative operating income then you won't have a tax expense in that year. When that happens, add the amount by which it was negative to a running total for your NOLs (Net Operating Losses). Each year going forward, if your Operating Income is negative then assume no tax expense and add the amount by which it was negative to your NOL

26 Sep 2009

Hi Guys, Had a question about free cash flow. Why dont we add back depreciation after tax since it is tax deductible? I mean we add back interest expense to CFO after tax as well. Just a little confused. Appreciate any answers.

30 Jul 2014

quick question: when I do DCF and trying to figure out FCF should I go with taxes that were actually paid or taxes that should have been paid for each corresponding period in the past? Thanks a lot!

01 Jul 2013

Maybe a stupid question, but when you calculate free cash flows by subtracting capex from EBITDA and the change in working capital, do you normally adjust for the fact that some capex might be sitting in accounts payable and hence should be backed out of accounts payable in order to not count it in both capex and change in working capital?

18 Sep 2013

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?

16 Jan 2011

I am currently building a model for a firm that grows at a constant rate for 5 tears, then after that, is expected to grow at 1% for infinity. how do i model the sales and FCF for that? Also, when building a model, does PPE grow at the same rate as sales? Would the same apply to LTD if no other information is provided?

15 Nov 2012

Hi to everyone! It could be a stupid question, but I just don't get it: how do investors retrieve FCF? I mean, all valuation is based on FCF - ok, we have FCF: +100 this year, what does it give to investor? It only means that company holds +100 in cash on its bank account, but to retrieve it, company should issue dividends - investor just can't come and retrieve cash. What do you think? I think I am just missing something very easy, but I don't understand what exactly. Thank you!

14 Feb 2014

Hey guys. I am currently pre-university, self-teaching myself in investing. I have been reading books on accounting and investing and i can firmly admit that i get confused sometimes on even plain and simple things. So my question might seem to you extremely stupid, but i really got confused on this one. Free Cash flow as i understand is ACTUAL money that the business generates after setting aside money for reinvesting and maintaining the operations. If we imagine that a company has $100 in Cash on the Balance Sheet and i calculate from the Cash flow statement that the FCF is 50, is that 50

02 Aug 2015

So free cash flow to equity is typically just cash flow from ops less capex (I guess some people include debt issued and repaid here as well), and free cash flow to the firm excludes interest expense but is similar. Let's say a company issued either debt or equity in a year and used the cash to purchase inventory. In this case, when people calculate change in working capital, inventory rises, suggesting lower cash from ops and lower FCF, but this expenditure on inventory was of course funded by the cash from the financing that probably wasn't captured in the FCF calculation. What am I missing here? Also, why do people talk about working capital (as opposed to all assets and liabilities) almost exclusively in these calcs? If I have goodwill impairment or a writedown in one of my long-term investments (that is, any non-cash change in existing assets), that will get backed out in the cash flow from operations calculation, fine. But if I'm trying to calculate FCF by starting from net income and adjusting for changes in WC (as well as capex and D&A of course), then I won't capture these changes in long-term assets, right?

26 May 2010

I've noticed that there some conflicting formulas for FCF (unlevered), which one is correct? Start with NI: FCF = NI + D&A - change NWC - CapEx Start with EBIT: FCF = EBIT - taxes + D&A - change NWC - CapEx These seem to be conflicting because interest is subtracted to get NI, while interest remains in EBIT. I believe that interest(1-t) should be added back to the first formula because interest expense is not to be included in FCF, is this correct? Then, is Levered FCF = FCF - interest expense? I am interviewing right now and am confused. Thanks for any help!

16 Sep 2010

Unlevered Free Cash Flow - is it CFO + CFI + Interest Expense, or CFO + CFI + CASH Interest Expense CFO takes the amort/discount into account - but if adding back to approximate FCF I think it should be Cash Interest expense, just confirming...

20 May 2014

Looking at basic DCF for AAPL: When Morningstar calculates AAPL's FCF from CFO (2013 10k) they calculate: Free Cash Flow = Cash flow from operations - (Payments for property, plant and equipment + Payments for acquisitions of intangible assets) Bloomberg doesn't include intangibles in their calculation.

06 Sep 2014

Hi guys, To calculate FCF for cash flow projections, the formula states FCF = EBIT(1-T)....... (and so on). My question is - is it possible to use EBIT(1-T) and (EBIT - Taxes) interchangeably? For (EBIT - Taxes), the amount of taxes can simply be obtained from the income statement/cash flow statement. Appreciate your help!

15 Nov 2013

Hello smart friends, I am tasked with valuing a state-owned airport that's in consideration of privatization. The enterprise is 100% debt financed and is not for profit. I must use DCF. I projected the FCF with the assumption that after privatizing the airport will have to expand operations in order to return to equity, and that corporate tax rate will apply. So Cap Ex, working capital, and tax rate changed. What's bugging me is the discount rate to use. Right now, the enterprise is 100% debt, so the WACC is just the cost of debt. After privatizing, it won't be 100% debt anymore. So

14 Nov 2017

received an interview question: what's the difference between FCF and CFBF at a HIGH level? I understand CF before financing includes a couple of other items but overall levered FCF = CF before financing?

09 Dec 2012

Anyone know how pensions work in unlevered FCF calculation?

28 Feb 2010

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