DCF Valuation - Period of Forecast

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Rajan

54 Points Joined January 2009

Dear All,

I am doing a valuation of a Company. The cut-off date on which date the balance sheet and profit and loss account (actuals) are drawn is 31st Dec 2019. The projections have been prepared from 1st Jan 2020, i.e., Q4 of 2019-20 for 5 years. I have a couple of question:

1. While preparing the Free Cash Flow for the 1yr - Should it be for FY 2019-20 (including actuals + projections for Q4) or only for Q4 of FY2019-20?

2. If my 1st Year Free Cash Flow is From FY 2019-20 or Q4-FY2019-20, should my 5th year, end in FY 23-24 or FY 24-25.

3. Can I ignore the three months projection of Q4-FY2019-20 and take the First Year as FY 2020-21?

4. MAT Credit Entitlement (already available in the Books) - should it be added to the Enterprise Value at actuals or after discounting and will there be a difference in the application if the MAT Credit was generated in the projections (i.e., in the future)?

Thanks and regards,

Rajan

Replies (7)

Hariom Viradiya

182 Points Joined February 2016

1) Since your projections start from Jan 20, your data should be for 5 calander years 20-21, 21-22, 22-23, 23-24, 24-25

2) Projection would end on Dec 25

3) No you cannot ignore Q4 of 19-20 because you said you are starting projections from 1st Jan 20. Further Q4 figures will be as per accounting records

4) MAT credit or say for any deferred revenue or expenditure your valuation would remain uneffected because it is just the excess tax paid which you will be allowed to adjust in next years. Over the infinite life of entity such deferment of credit goes on and on and hence has no impact on valuation. Rather i would suggest you to just calculate tax expense for each year and treat it as a cash outflow

Rajan

54 Points Joined January 2009

Thank you for your response, Hariom.

However, a small clarification on Point No.2: Is there any way I can do the valuation with Projections for 5 FY + Q4 (i.e., till March 2025) instead of doing it on Calendar Year basis?

Hariom Viradiya

182 Points Joined February 2016

Yes you can dot it. Projections will be as follows

FY 19-20 Q4 - Based on accounts
FY 20-21 - Based on projections
FY 21-22 - Based on projections
FY 22-23 - Based on projections
FY 23-24 - Based on projections
FY 24-25 - Based on projections

Projection end date = 31st march 25

Rajan

54 Points Joined January 2009

Thank you for the response. I am sorry to bring up the conversion again.

Technically, I do not have the accounts for FY 19-20 as of now. Only Book of Accounts till 31.12.2019 is presently available. So I am going to rely on the projected number for that quarter also.

Further, what you are suggesting is, I need to prepare a P&L (projected) for 3 months, Balance Sheet for the 3 month period and Cash Flow for that period (based on the Closing Balance as on 31.12.2019). The question is what do I do with year-end appropriations like depiction, provisions and tax for the previous period (i.e., 01.04.2019 to 31.12.2019) for the Q4?

If such is the case then, there would be a major loss in the Q4 (First Year). Is that acceptable?

Thanks.

Hariom Viradiya

182 Points Joined February 2016

As per what you have said, I need to know some things from you end :-
1) Is the company having cash loss ?
2) Have you paid advance tax during 19-20 ?
3) Do you expect further tax payable or refund at year end ?

Rajan

54 Points Joined January 2009

My responses:

1. Yes.

2. No.

3. Yes - MAT is applicable.

Hariom Viradiya

182 Points Joined February 2016

If you are having cash loss for then no need to calculate provison for tax...
Further you have to discount cash flows hence no need of calculation of depreciation as it is non cash expenditure