Deferred Taxes FCFF

CFA Level II
#1

This is a noobie question… the FCFF calculated in DCF to evaluate target companies (Corp. Finance section) include adjustments for deferred tax assets/liabilities. Are the same deferred tax asset/liab. adjustments necessary when calculating FCFF for equity valuation? Thanks

#2

if the deferred tax asset/liablity is not expected to reverse in the projected future, then an analyst would need to adjust FFCF accordingly. shouldn’t matter whether your goal of analysis is Corp Finance, or Equity valuation.

i guess the adjustment would be

FCFF = FCFF + DTA

FCFF = FCFF - DTL

anyone commment pls?

#3

From the Level 1 I remember that DTL if not expected to reverse should be handled as the part of equity. Thus, I would say that you add DTL and substract DTA.

#4

Increases in DTL should be added back to FCF if they’re not expected to reverse in the future (this is in the equity section).

CF seems to take a different approach than Equity as it suggests NOPLAT as the starting point for FCF, which is Unlevered Net Income + Change in Deferred Taxes, but the treatment of deferred taxes is the same.

#5

I’d also add DTL and subtract DTA

#6

Thanks. I get the add/subtract part of deferred taxes.

I just wanted confirmation on whether deferred taxes are treated the same way in valuing a share of equity with FCFF valuation.