As a practical matter, how do you guys put together DCF’s when you’re in 4Q? Omit 2007’s FCF’s completely and have the model start in 2008? Or do you have a 2007Q4 column and then move on to 2008, 2009, etc, while weighting everything accordingly? Would you ever just start with a 2007 column that contained actual Q1-Q3 figures and predicted Q4 figures? This last method doesn’t seem right… Also, if the company will be buying back a significant amount of shares over the next few years, would you still use today’s (or the end of 2007’s) share count, or should you use more of a weighted average over the next few years?
Given all the other estimates which go into a DCF, I think this is way down the list in terms of importance. That said, you could discount the 4th quarter for .25 of a year, or you could recast the fiscal years so that you’re basing your DCF on full years only, or you could create a full quarter by quarter model, and probably a few other things I’m forgetting.
Also with regards to your second question, any model should include a share growth/decline factor.
as for share count - the economic value of the business doesn’t change based on shares outstanding. you might want to consider the future capital structure in order to best arrive at a WACC but for your per share DCF valuation the economic value of the business doesn’t change. so value it accordingly and use today’s share count. as the share count changes over time, take your updated valuation and divide it by the new share count. on your income statement forecast project changes in shares o/s for EPS numbers. this will allow you to adjsut your multiple valuation.
Set your valuation date accordingly, and may be use stub year discount factors. As for the share count, see how the repurchase affects the capital structure, you may want to use some target capital structure if management has noted the amount of share repurchase.
sounds good, thx everyone