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## CORPORATEVALUATION

by: Ms. Bertha Tromp

29

0

2

# CORPORATEVALUATION FNCE728

Ms. Bertha Tromp
Penn
GPA 3.66

Staff

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COURSE
PROF.
Staff
TYPE
Class Notes
PAGES
2
WORDS
KARMA
25 ?

## Popular in Finance

This 2 page Class Notes was uploaded by Ms. Bertha Tromp on Monday September 28, 2015. The Class Notes belongs to FNCE728 at University of Pennsylvania taught by Staff in Fall. Since its upload, it has received 29 views. For similar materials see /class/215363/fnce728-university-of-pennsylvania in Finance at University of Pennsylvania.

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Date Created: 09/28/15
CALCULATING THE FREE CASH FLOWS WHEN THERE ARE NEGATIVE PROFITS this version February 13 2001 An example We start of with a simple example A rm which has no depreciation no changes in NWC and no capital expenditures has the following pro ts in two successive years Exhibit 1 Pro t amp Loss with Carryforward Year 1 Year 2 EBIT 100 400 Interest 50 80 Pro t before tax 150 320 Loss carryforward 0 150 Taxable income 150 170 Taxes 30 0 51 Pro t after tax 150 1 l9 To calculate the FCFs of the rm we calculate the PampL which it would have had including tax carryforwards if it had no interest payments Exhibit 2 FCF with no Debt Year 1 Year 2 EBIT 100 400 Interest 0 0 Pro t before tax 100 400 Loss carryforward 0 100 Taxable income 100 300 Taxes 30 0 90 Pro t after taxFCF 100 210 FCF add back loss 100 310 carryforward Calculating FCFs when the firm has losses page 1 The loss carryforward is added back to the PAT since it is a non cash charge against earnings like depreciation We can also do this calculation directly from the Pro t and Loss Statement Exhibit 3 Calculating FCF from PampL Year 1 Year 2 EBIT 100 400 Interest 5 0 80 Pro t before tax 150 320 Loss carryforward 0 150 Taxable income 150 170 Taxes 30 0 51 Pro t after tax 150 119 FCF calculation Pro t after tax with carryforwards 150 1 19 Add back loss carryforward 150 Add back interest net of tax 50 56 Subtract out interest tax shield carryforward 15 Free Cash Flow 100 310 What is the value of the rm As in all cases the value of the rm is the unlevered value ie the present value of the FCFs discounted at the WACC plus the value of the tax shields Here we will have 1 td 1 t50 1 td 1 t1 t80501 tt 11 tdz39 39 11 tdi2 This has simple explanation In year 1 the stakeholders in the rm get a net aftertax bene t of interest of 1 rd 1 t 50 instead of the net tax bene t of 1 rd 1 t1 t5 50 which they would have gotten if the rm had been fully taxed at the corporate level Thus the rm s stakeholders lose ltd1tz1tcl 50 l1td1tzl50l1t21t21hl 50 1 t1 1 t 501 tt50 PVnet interest paid out In the next year when they can realize the carryforwards they get this back For practical purposes I would ignore this aspect of loss carryforwards in the valuation ie stick with VU VL Calculating FCFs when the firm has losses page 2

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