The present value concept discounts the cash flows of a period by the entire period using the discount rate. The DCF valuation method relies on the present value concept to value the cash flows of a business. Therefore the DCF valuation method also discounts the cash flows of a period by the entire period using the discount rate. This assumption may be an appropriate reflection of reality for most companies. But not all companies. For some companies, the midyear convention is not appropriate. We this when the midyear convention is not appropriate on this page.
First, we must appreciate that there is a difference between depreciation and amortization cash flows as computed in the IRS code/tax books or those reported in the financial accounting/reporting books. Now we can discuss, which of these must be factored into our DCF valuation model.
If you had access to depreciation and amortization cash flows as computed in the IRS code/tax books or those reported in the financial accounting/reporting books choice, which one would you prefer to use?
How will your DCF model change if your company pays for acquisitions using cash, stock or both? The free cash flow of a company is lower if a company pays for acquisitions with cash. The free cash flow will be higher if it pays using stock.
We address its question here: “How does it matter if the company pays for acquisitions using cash, stock or both when estimating cash flows for a valuation?”
We looked at how to forecast the revenues of a company that has a history of acquisitions. But how do we forecast the revenues of a company that has a history of acquisitions?
We address this question on this page: “How are acquisition costs forecasted for a company that has a history of acquisitions?”