DCF question - getting different answers for the same situation

musicgold1 · July 30th, 2013, 7:18 pm

Hi,This is a conceptual question. I am confused with a DCF situation. The Excel file stored at the following link has my calculations. http://www.filedropper.com/dcfquestion I am trying to do a very simple three-period DCF by two methods: 1. deducting interest expense from cash flow 2. accruing interest expense to debt. However, for some reason the two methods are giving me different answers (the yellow cells show the answer). Theoretically, both of them should yield the same answer. Can anyone here please help me understand what I am doing wrong?Thanks.

Tad · July 31st, 2013, 6:02 am

Hi,I can't open your file right now, and maybe your problem is a very different one, but let me try:The issue that first comes to my mind, due to it being overlooked by many people, is that you need to take care of the tax shield effect (in your second approach)?

musicgold1 · July 31st, 2013, 2:19 pm

This situation is simpler than that. I am not including any tax impact.

ppauper · July 31st, 2013, 4:58 pm

why do you expect them to give the same answer ? the discount rate (10%) is different to the interest rate (5%).If the discount rate were equal to the interest rate, then I think they would give the same answer

musicgold1 · July 31st, 2013, 5:00 pm

The discount rate is the wtd. avg. of the cost of equity and the cost of debt. The assets are funded with 50% debt. I think We need to discount the cash flows with the correct cost of capital.

ppauper · July 31st, 2013, 5:23 pm

what I said is the reason you're getting different answers.

Anthis · July 31st, 2013, 6:37 pm

QuoteOriginally posted by: musicgold1This situation is simpler than that. I am not including any tax impact.Thats very wrong.