•Interest expense is tax deductible (hence the multiplication (1 – tax rate) in the WACC formula). The bridge between debt-free cash and stock value is net debt (see the second enumeration point above), although there is also another way to achieve this, as shown in the third enumeration point above. It`s a “U-shaped” curve, where debt will decrease to a point and then start to increase it. $700 billion (enterprise value) + $200 billion (non-operational assets) – $50 (debt) = $850 billion Banks use debt differently than other companies and don`t invest it in business – instead they use it to create products. In addition, interest rates are a critical part of banks` business models and working capital receives a large part of their balance sheets, so that a DCF would not make much sense for a financial institution. A letter from a buyer who offers to buy a business usually contains the words: “This offer is made on a debt-free, illiquid basis.” Alternatively, a seller, after providing information about the transaction, could request offers “on a cash-free basis.” In this article, we have: it`s tricky – whoever has no debt will have a higher WACC up to a certain point, because debt is “cheaper” than equity. What for? Leasing would normally be tax deductible, so rental costs would be as taxable as debt costs. For the cost of equity, you can use the Capital Asset Pricing Model (CAPM – see next question) and for others, normally consult comparable companies/bonds and interest rates and returns of similar companies for estimates. The problem is that under IFRS 16, cash flows are reclassified, which affects the valuation of operating cash flows, and new debts appear on the balance sheet. Operating cash flows that are part of the company`s free cash flow and net debt are key elements of a DCF analysis based on the value of the company. If you are not careful when adapting to IFRS 16, your DCF model may go wrong. The net debt formula is simply the value of all non-discharge claims minus the value of all non-operational assets: the above applies, however, only up to a certain point.
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