Chapter 3 - Discounted Cash Flow



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How is Capex treated while calculating DCF? 0/2
It is added to the EBITDA - Incorrect
It is subtracted from the EBITDA - Correct
It is not included in the DCF calculations - Incorrect
How is Depreciation & Amortization treated while calculating DCF? 1/2
D&A is added to the EBITDA - Incorrect
D&A is subtracted from the EBITDA - Correct
D&A t is not included in the DCF calculations

While calculating the Teminal value we actually add Deprecation and Amortization value to EBITDA and Capex remain unchanged. The answer of these above questions contradicted that fact?

1 Answer(s)


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The option "D&A should be subtracted from EBITDA" basically indicates what is done in the video were we start with EBIT (hence D&A is already subtracted from EBITDA) to show the unlevered net income.

Fundamentally this is how you calculate Unlevered FCF (UFCF)
1. Start with Earnings before interest and taxes (EBIT) x (1-Tax Rate)
2. Add back any dep/amortization (non cash expenses)
3. Subtract any changes in NWC (CA-CL)
4. Subtract any capex
5. Arrive at FCF

Now you will notice that the tax amount is applicable to EBIT and not EBITDA. Thats why first we start with EBIT (without the DA), then apply the tax rate to the EBIT, then add back D&A to reflect UFCF.

Unlike what you said in your answer, you cant just start with EBITDA (just because you are adding D&A back). If you start with EBITDA then the effective tax amount (lets say 30% of EBITDA) is different from the correct tax amount (30% of EBIT). So we start with EBIT, then apply the tax rate on this amount, then add back D&A.

Is this explanation helpful?