DCF Valuation?

Question

I am trying to calculate the free cash flow of a company for DCF analysis. I am having trouble calculating the Operating Expense. Coming from a non financial background, I am finding the information on web sites to be inconsistent. A sample that I got from businessweek for Dredging Corporation of India is given below:

Year: 2007

Tot Rev 5728.9

COGS 2870.4

Selling Genl & Admin Exp, Tot 373.2

Dep & Amor, Tot 365.8

Other Op Exp 560.6

OTHER OP EXP, TOT 1,299.6

Op Income 1,558.9

Interest Exp -21

Int and Inv Income 365.9

NET INTEREST EXP 345

Other Non-Op Income (Expenses) 154.9

EBT, INCLUDING UNUSUAL ITEMS 2,063.4

Op Margin 33.8

1. Op Cost = COGS + OTHER OP EXP, Tot - Dep & Amr, Tot

= 2870.4 + 1299.6

= 4170

2. Op Cost = Tot Rev - EBT

= 5728.9 - 2063.4

= 3665.5

2. Op Cost = (100 - Op Margin)/100 * Rev

= (100 - 33.8)/100 * 5728.9

= 3792.53

Would you please suggest as to which of the values can be used as the Operating Cost for the DCF analysis? Thanks.

Answer 1

first of all, it depends on whether you're trying to calculate debt-free cash flow, or free cash flow to equity.

but it gives you total operating expenses in the question.  it's your SG&A plus Depr and Amor plus Other Operating Costs.

your operating income is the equivalenet to EBIT, since interest expense is a line item below Operating Income.

So your cash flow (on a debt free basis, which means you have to use WACC in the PV calc) is:

EBIT - Change in Net Working Capital - Capital Expenditures + Depreciation/Amort + other noncash charges.

I don't see CAPX or Working Capital info, so you would just add EBIT ($1,558.9) to Depre/Amort ($365.8) = $1,924.7

you should also remove the unusual items, which in this case are equal to $694.5, to normalize your cash flow.  this is calculated by taking your operating income less net interest expenses plus other non-op, to get to your EBT.  but it tells you that w/unusual items (in this case a gain), your ebt is $2,063.4.   so the difference between actual EBT, which was around $1,3000 and the $2,063.4 must be added back to cash flow.

this results in gross adjusted cash flow of $2,619.3.   Note: this is not the same as Free Cash Flow, b/c you've not accounted for CAPX  or the change in working capital.

Answer 2

This is going strictly off of memory, but I believe that Mr. Buffet uses EBTA as "(free) cash flow."  While depreciation is a non-cash expense, I think his reasoning was that it would ordinarily eventually become a necessary expense to ensure ongoing operations.  As far as doing the DCF, use a finance calculator if you have one, or the NPV function in MS Excel.