Other Advanced DCF Additiosn

Question 1

When you’re calculating WACC, do you count Convertible Bonds as real Debt?

Answer 1

If in the money dont count as debt, but instead assume they contribute to dilution, so EV higher

If out the money, then count as debt and use IR on the convertible bonds for the cost of debt, also. Include them in debt for formula for levered beta

Question 2

What about the treatment of other securities, like Mezzanine and other Debt variations?

Answer 2

If interest is tax-deductible, count them as debt in levered beta calculation, otherwise count as equity

For WACC, normally look at each type of debt separately and assume the cost is the weighted average effective interest rate on that debt

Question 3

Should you ever factor in off-Balance Sheet Assets and Liabilities in a DCF?

Answer 3

Maybe yes if they have a big impact on EV

Question 4

How do Pension Obligations and the Pension Expense factor into a DCF?

Answer 4

If unlevered DCF, and count unfunded pension obligations as debt, should exclude pension related expensive from unfunded obligations one

For levered FCF, do opposite and leave these expenses in as they are a form of interest expense

Question 5

Can you explain how to create a multi-stage DCF, and why it might be useful?

Answer 5

Use if comp grows at much different rates, profit margins or has a different cap structure in different periods

Question 6

How does Net Income Attributable to Noncontrolling Interests factor into the Free Cash Flow calculation?

What about Net Income from Equity Interests?

Answer 6

It doesnt, subtracted at bottom of IS and added back on CFS

Question 7

Which tax rate should you use when calculating Free Cash Flow – statutory or effective?

Answer 7

Effective as you want to capture what the company is actually paying out in taxes, not what it should be paying out

Question 8

When calculating FCF, you always take into account taxes. But when you calculate Terminal Value, you don’t do that – isn’t this inconsistent? How should you treat it?

Answer 8

• if using GGM you are taking taxes into account as you are valuing the company’s FCF into perpetuity
• if using MM, implicitly taking taxes into account, as you assume [Relevant Metric] * [Relevant Multiple] is the company’s present value from that point onward, as of the final year. You’re not assuming that the company is actually sold… just estimating what a buyer might pay for it, fully taking into account the value that the buyer would receive from its far-in-the- future, after-tax cash flows.