Re: Perpetuity Growth Method
This is the same reason that we encourage folks to use Tax-Effected EBIT instead of FCFF in the terminal value calculation using perpetual growth. The entire point of perpetual growth method is that it's only applicable for stable growth, mature, cash cow businesses. Therefore, in the long run, CapE... This is the same reason that we encourage folks to use Tax-Effected EBIT instead of FCFF in the terminal value calculation using perpetual growth. The entire point of perpetual growth method is that it's only applicable for stable growth, mature, cash cow businesses. Therefore, in the long run, CapEx and Depreciation net out (maintenance CapEx only, not growth CapEx) and thus Tax-Effected EBIT is normalized FCFF. Working capital requirements tend to be very little as well, although one can argue to include the effect of that as well, although we did not. This topic is covered more extensively in our Basic Financial Modeling and DCF Modeling course, including pros and cons of each approach. Read More

Re: Current liabilities
Yes, for purposes of calculating working capital from the finance perspective, we would definitely exclude cash from Current Assets and debt related items from Current Liabilities. Keep in mind that the Accounting definition would have us do a straight Current Assets / Current Liabilities.

Current Liabilities
When we calculate the liquidity ratios, would it make sense to exclude the short-term interesting-bearing liabilities from the current liabilities? So, e.g., instead of using $48,826 for WMT, we could use $40,178. I've seen this done a couple of times and wanted to make sure what is the right way. S... When we calculate the liquidity ratios, would it make sense to exclude the short-term interesting-bearing liabilities from the current liabilities? So, e.g., instead of using $48,826 for WMT, we could use $40,178. I've seen this done a couple of times and wanted to make sure what is the right way. Specially because we are saying that we want to understand "working capital" and not "financing decisions" with these ratios (and one may think that short-term borrowings, etc. would fall on the "financing decision" category). Although I understand that those are still current outflows that you have to meet...
Thanks a lot! Read More

Working capital exhibit
Where can I find the working capital exhibit that keeps getting referenced?

Re: TEV
Once again, TEV assumes appropriate level of working capital that does not required additional funds, i.e. a run-rate company and if you have working capital shortfalls, you may not be a going concern. If you have a (small) shortfall of working capital to sustain the day-to-day business, then ye... Once again, TEV assumes appropriate level of working capital that does not required additional funds, i.e. a run-rate company and if you have working capital shortfalls, you may not be a going concern.

If you have a (small) shortfall of working capital to sustain the day-to-day business, then yes, it would be ok to reduce the level of cash (or increase debt) to replenish WC back to required levels.

In your modified formula, it would be working capital shortfall (i.e. required working capital level less existing working capital level), not the absolute level of working capital as you seemed to indicate.

Also, in your original question you added net working capital to TEV which is wrong.

In addition, we would not typically include "Other" in the working capital calculation, but it really depends on what's in "Other", both assets and liabilities.

Moreover, Current Assets must not include cash and equivalents nor short term investments and current liabilities must not include debt related items.

Finally, long term liabilities are not considered in working capital calculations either. ARO, DTL, etc are most definitely not part of working capital. Read More