1) Depending on the size and how material the NOLs are, you would value the NOLs separately. Please see other topics Q&A for discussion on NOL treatment for valuation and DCF purposes. 2) ST Debt is always considered debt, regardless of the use of the debt. Please see the topic entitled Treat... 1) Depending on the size and how material the NOLs are, you would value the NOLs separately. Please see other topics Q&A for discussion on NOL treatment for valuation and DCF purposes.

2) ST Debt is always considered debt, regardless of the use of the debt. Please see the topic entitled Treatment of Revolver as Debt for TEV in the M&A and LBO forum

3) Regarding grants - that gets a little too specific into grant accounting nuances. However, for DCF purposes, calculate the cash impact into your cash flow stream. We don't really care about accounting treatment so to speak. Thus, what we would want is to see a separate grant income on the FCFF. Whether that's already part of EBIT in your starting point or completely separate, it doesn't matter.

4) This is a tricky question and goes back subjectivity. The traditional accepted practice is actually to use TOTAL debt since Debt/Equity ratios are calculated based on actual capital structure. In the event of no debt and a minor cash balance, or the opposite extreme, no debt and a major cash balance, it begs the question of using NET debt. The idea of TOTAL debt stems from the entire capitalization of the company. In either case, we would frown upon adding back Interest Income since EBIT is meant to be before capital structure.

5) What is the context of the question? Future tax shield is NEVER added back to TEV from a valuation point of view. That is news to us. Even for purposes of an LBO, we don't do that. Again, NOLs are valued separately.

refer to this post:
How do you factor net operating losses (NOLs) in valuation? Read More

Thnaks for your replies. I really appreciate it. However i have some comments 1) In my projections the Co has NOLs of c 20m. The first 2 years the company has negative EBIT hence cash taxes on EBIT do not apply. This is possible from the 3rd till the 5th year.That way i included the "lowering on ... Thnaks for your replies. I really appreciate it. However i have some comments

1) In my projections the Co has NOLs of c 20m. The first 2 years the company has negative EBIT hence cash taxes on EBIT do not apply. This is possible from the 3rd till the 5th year.That way i included the "lowering on cash taxes paid" which effectively were all zero througout the 5 year projection period due to the increased NOLs.
2007 2008 2009 2010 2011 2012
NOLs 22m 27 29 26 23 20
EBIT -5 -2 3 3 3
EBIT*(1-T) 0 0 0 0 0
NOPAT -5 -2 3 3 3

My question now lies as to how we treat the 20m NOLs left in 2012?


For the calculation of the EV the formula will be

EV=TEV-Net Debt+PV of Tax shield. This is why i said in my previous post "you add back the tax shield on the TEV". I know it sounded misleading at first. Read More

You would add back the PV of future unused NOL (not interest as you first indicated).

Calculate when the NOL shall be used in the future and discount that stream back. Note that in the USA you are limited by section 382 of the tax code.

Which rate should we use (Cost of Debt or WACC) to discount the unsuded NOLs of the last projected year? With regards to my reference on the interest expense i think i have not explained properly my thought. A company enjoys 2 different tax shields, one arising from the NOLs (hence to be used ... Which rate should we use (Cost of Debt or WACC) to discount the unsuded NOLs of the last projected year?

With regards to my reference on the interest expense i think i have not explained properly my thought.

A company enjoys 2 different tax shields, one arising from the NOLs (hence to be used directly on the DCF the way you said and as i showed on the example). The other arises from the capital structure of the company. If we make the assumption the the company will enjoy a fixed capital structure from the year 2012 onwards that means that it will haev some interest expenses on its P&L. This creates a tax shield. My view is the we can calculate the present value of this form of tax shield (which has nothing to do with the calculation of the FCFF) the follwing way:

Net Debt of last projected year x Cost of Debt x Marginal Tax rate=Tax shield from leverage (treat it as a perpetuity)

Then we can incorporate this amount to the calculation of EV where eventually it will increase it.

This was my original thought

Thanks again fro your support!! Read More