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Also, for MUE analysis, are you including net cash in the computations, or are you looking purely at the baked-in growth rates on TTM FCF?

Hi Fletch,

Thanks for sharing the math. The math you're running to calculate cash equity value is different from what I'm doing. You're calling the FCF you calculate free cash flow to the firm (FCFF). When discounted and summed, this values the enterprise value of the firm. Adding cash and subtracting debt then converts EV to market cap, which is the equity value of the firm. Compare that to current prices and you get over- or undervalued (or fairly valued). And, as you noted, the discount rate has a huge effect on the intrinsic value (which it does for any DCF model).

Where we differ is that when I calculate FCF and then discount the future FCF values, I'm equating that directly to market cap, the equity value of the firm. So, there's no addition of cash or subtraction of debt.

But, I probably should adjust this. FCFE (FCF-to-equity) is actually net income - (net capex + depreciation - average acquisitions) - (changes in working capital) + (net debt issued). That's what I've been using for Nam Tai (NTE) but not for the others. Using CFFO - capex is a shorthand for the above, but if it's equated to FCFE, it assumes a stable capital structure (very little net debt being issued or paid off and relatively small acquisitions, if any).

Anyway, the fact that you went from EV to market cap almost certainly explains the differences between our two models (assuming we both had similar FCF values calculated).

Cheers,
Jim
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