Quey regarding DCF Valuation

arorashivam033
Posts: 2
Joined: Mon Jul 11, 2016 7:57 am

Quey regarding DCF Valuation

Postby arorashivam033 » Sun Jul 17, 2016 9:17 am

My query is when we are calculating Value of firm through DCF model why we use this formula i.e. EBIT(1-Tax rate). More or less this formula depicts that firm would be paying tax on EBIT value which is not fundamentally correct as firm always pays tax on PBT and my second query is why Margin money kept in bank has been ignored while calculating increase in working capital in free cash flow for firm?

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edupristine
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Re: Quey regarding DCF Valuation

Postby edupristine » Tue Jul 19, 2016 6:53 am

Hi Shivam


While calculating value of the firm, we are calculating FCFF which is Free cash flow to the firm. This includes both debt and equity holders. For Equity holders, the income is PAT and for debt holders income is Interest. So, to calculate FCFF we need to include both incomes as it is for both debt and equity holders. EBIT has both components, so we use EBIT.

arorashivam033
Posts: 2
Joined: Mon Jul 11, 2016 7:57 am

Re: Quey regarding DCF Valuation

Postby arorashivam033 » Tue Jul 19, 2016 7:31 am

Thank You so much for the reply and I would like to ask you one more question as I was trying to solve FMCG Case Study by my on. So I am stuck at Interest Calculation Part as Interest should also be calculated on the new loan raised but value of new loan to be raised has to be calculated from cash flow. But without interest calculation I can not reach the PAT level which is the first step for cash flow. So please sort it out or leave a contact number so that i can contact for the same.


Best Regards
Shivam Arora

edupristine
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Joined: Wed Apr 09, 2014 6:28 am

Re: Quey regarding DCF Valuation

Postby edupristine » Fri Jul 29, 2016 7:06 am

Hi Shivam

Will you please share the excel of FMCG Case Study with us?


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