I am doing a dcf on ABT (Abbott laboratories). why this one. well M* has cost of equity and cost of capital data for this one so i want to see if i can do it right and verify to see if my answer is within the ballpark of their estimate. Steps: 1) calculated past 4 years of FCFE. its a bit different from M*. They calculate FCFF as CFO-Capex. I am going to use FCFE and then discount with cost of equity. I use FCFE = CFO - CAPEX + net borrowing. 2) Do i project sales and estimate each line item (cfo, capex, net borrowing) or just project a normalized growth of FCFE for next 5 years and then derive a terminal value using a constant growth rate of FCFE of 3% (growth rate of economy). -------------------------------------------------- Questions: 1) are these methods ok? 2) what do you do when FCFE has been volatile for a company in the past what do you do? 3) there is so many articles on just how to calculate FCFE and FCFF i am getting a headache. what formula do you use? thanks a lot for any help
Assuming you’re calculating OCF using the indirect method (starting with net income at the top), your net income on the DCF should just link up to the net income line on your income statement tab. You should then be forecasting working capital, capex, and net borrowing items separately. Generally, your model will be most robust if you forecast each of the critical lines separately, as opposed to doing a single normalized growth rate based for FCFE. However, for a company like ABT, you might be able to get away with forecasting “shortcuts” since its CFO’s and capex activity are pretty stable and predictable. Still, for the purposes of your modeling exercise, you’re best off forecasting the items separately. For a company that has volatile FCFE’s, DCF/NPV is still a relevant way to arrive at valuation. However, you may consider using a higher discount factor because companies with less predictable cash flows carry lower multiples or takeout valuations because of their risk. FCFE = [FCFF - tax effected interest expense + net borrowings] is the formula I would use, and your 3% perpetual growth rate for FCFE seems reasonable for your terminal value assumption. Hope that answers your question. Also, for the purposes of modeling, I can send you a basic three-statement model for ABT that has all the numbers you need, and then you can just build your DCF off of that to see what the numbers look like. For a company like ABT where there’s a lot of data, focus on good modeling practices and mechanics. Drop me an e-mail if you want it.
Numi, thanks a lot man. I really appreciate it. i will follow your advice and build up a model. If i have further questions, i will send an email your way. thanks for taking the time to help out.
Hi Numi, could you send me a 3 statement model too? I’m trying to learn how to model and would like an example. I can be reached at demasoni(at)gmail.com Thank you.
sure, will try to do it later today…just email me again if i forget