Stock-Based Compensation in a DCF

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Stock-Based Compensation in a DCF

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Mergers & Inquisitions / Breaking Into Wall Street

Күн бұрын

Пікірлер: 45

@ajiebooks 7 күн бұрын

Super helpful, and easy to understand. Love it

@financialmodeling 6 күн бұрын

Thanks for watching!

@stephenchung97 2 жыл бұрын

Excellent explanation and walk through. Thank you!

@financialmodeling 2 жыл бұрын

Thanks for watching!

@Virus278 6 жыл бұрын

Thanks. This makes a lot of sense.

@financialmodeling 6 жыл бұрын

Thanks for watching!

@aaronhafer4547 8 жыл бұрын

Extremely helpful

@financialmodeling 8 жыл бұрын

Thanks for watching!

@mayerweinroth4246 3 жыл бұрын

Hi your explanation is top notch cant describe how much this channel helped me! question i have regarding SBC, would not it be right to adjust SBC to cash flow from financing activities? and i do believe that sbc is a real cost theres an example ill make A) if a company has net income of 1B and sat its earnings grow at 15% annual for the next 20yrs the final value would be 1*(1+15%)^20=16.37B B) now lets say we dilute shares 2% annual that is for every 100shares we create 2out of thin air for 20years so, the shares will increase by a factor of 1,49X. (1+2%)^20 and EPS also would increase by (1,15/1.02)^20=11,01 times , SO without SBC earnings increased 16times and with SBC earnings increased 11 times that is SBC in this case reduced our earnings by 30% and it should be considered as a real cost . Is this logic correct?

@financialmodeling 3 жыл бұрын

I'm not sure I understand your question, but since SBC always appears on the Income Statement, either separately or embedded within other items, it always reduces Net Income and EPS. The exact percentages over 20 years are difficult to predict because the value of SBC, the exercise prices of the options, etc. change over time, but yes, for some companies, it could result in an 11x vs. 16x increase.

@noahleidinger8489 8 жыл бұрын

Thanks it was pretty interesting

@financialmodeling 8 жыл бұрын

+Noah Leidinger Thanks for watching!

@jl7702 2 жыл бұрын

Shouldn't you keep items such as "Loss on disposal of property and equipment"? As mentioned in the videos, these are non-recurring items and would have initially been reflected on the income statement. So on the cash flow statement, aren't they actually being reversed which is what we want to see? Otherwise if we leave it out like in the video, we would be including the effects of the loss on disposal of property and equipment (which is not what we want to do since it is a non-recurring item).

@financialmodeling 2 жыл бұрын

These are non-recurring items, so they should not be included in forecasts or projections. The only exception is if you know for a fact the company is going to sell an asset in the very near-term and you have an idea of the price and other terms. Gains and Losses should be removed from EBIT on the Income Statement in historical periods (if applicable) so you can make a proper comparison.

@StephaneSevigny 7 жыл бұрын

Thanks for the video! I had a related question I was hoping would be addressed here. Since SBC is treated as a cash expense in companies with significant recurring SBC, would you add back in the "Proceeds from the issuances under SBC plans"? This cash inflow is not an operating one, but the company is indeed receiving it. Thanks for the help in advance!

@financialmodeling 7 жыл бұрын

You should ignore something like that altogether. SBC should be treated as a normal cash compensation expense, and companies should not benefit from issuing it. If you add back proceeds from SBC issuances, you're boosting the company's FCF without accounting for the additional shares created.

@Max-rr7cd 2 жыл бұрын

Thank you that was very helpfull.

@financialmodeling 2 жыл бұрын

Thanks for watching!

@andychen4631 5 жыл бұрын

Thanks for the video. Really helpful. However, whether the SBC should be added back to calculate the FCF, I might have a different thinking. Since unlevered FCF corresponds to enterprise value, its the value of core business to all investors. So SBC is like interest expense to some extent. Then does it make more sense to add back SBC to exclude its impact on net income and FCF. Also for other non-recurring items, should we add back one time loss and subtract one time gain to normalize the FCF instead of just not being factored into calcualtion at all? Thanks.

@financialmodeling 5 жыл бұрын

Yes, that is another way to think about it. SBC only affects one investor group, so it should not be counted as an add-back in Unlevered FCF. You can add back losses and subtract gains in historical periods to get normalized numbers, but you shouldn't be projecting these items at all in future periods, so you shouldn't have to add or subtract anything.

@nikolastakic3725 4 жыл бұрын

I really appreciate the explanations! I was wondering if it's possible to download from somewhere those excel sheets that you were using in analysis so we can adjust them and practice DCF valuation for some other companies. Thanks a lot.

@financialmodeling 4 жыл бұрын

This specific Excel file is not available, but if you look at the other DCF tutorials in the channel, plenty of them do have the Excel files. Click "Show More" and scroll down to where it says, "Resources."

@kcho6064 2 жыл бұрын

Awesome video!! Would you remove Change in Accounts Receivables and other Changes etc?

@financialmodeling 2 жыл бұрын

No, those are operational and do not affect the capital structure.

@yoelherman5344 7 жыл бұрын

Thanks a lot. Quick clarification - so in the end, your suggestion is to not adding back SBC in the FCF computation, and not to increase the # of diluted shares in the future that was caused by a SBC programs of the company, right?

@financialmodeling 7 жыл бұрын

Yes. Exclude SBC from all DCF analyses and count it as a real cash expense.

@ashishsrivastava2529 8 жыл бұрын

Hi, Very useful video. thanks for posting it. I have some questions though, So after excluding (not adding back) SBC from future cashflows, the NPV from DCF should be divided by outstanding shares or fully diluted shares? Dividing by fully discounted shares would lead to double counting? (first deducted as expense from the numerator and then added to sharecount in denominator?) Another thing is, for comparing two companies, one with SBC and other without, using multiples: 1. Is Earnings yields a good measure for such companies? Where SBC is expensed but the denomintor is outstanding shares (not diluted sharecount) OR 2. Is FCF yield a better measure, where I add back SBC but divide by diluted share count? 3. Is there any other better way to compare relative valuation. Thanks much for your help in advance

@financialmodeling 8 жыл бұрын

You still divide the PV derived from the DCF by the fully diluted shares, because those all exist *today.* SBC is about the additional shares that may exist in the future. So it is not double-counting to divide by the fully diluted share count. For comparing two companies where one has SBC and the other does not, Income Statement-based metrics are the best ones to use (EBIT, EBITDA, EPS, etc.) because you should always count SBC as a real expense. FCF is problematic because SBC gets added back in the calculation depending on how you've set it up. So we recommend avoiding cash flow-based metrics in this situation.

@pedropaganella1415 8 жыл бұрын

I have the same question from Ashish. If I understood correctly, the SBC are like options that can be exercised by the employees at any time, so aren't they already counted in the fully diluted shares? btw, great videos!

@financialmodeling 8 жыл бұрын

Stock-based compensation often refers to options. But the fully diluted share count represents only what is available *TODAY*. It does not include future issuances. And that is the problem: we want to exclude future issuances, or at least not count them as non-cash expenses, because those future issuances will increase the company's share count in the future.

@pedropaganella1415 8 жыл бұрын

Thanks for the feedback!

@KrishanSingh-gz9op 2 жыл бұрын

My question is ,if an employee decides to exercise an option, will he has to pay any Money or premium , just like we pay premium when we buy options in the stock market? And secondly, I read somewhere that "exercising options will bring in cash into the firm". How? & what does it mean?

@financialmodeling 2 жыл бұрын

Yes the employee has to pay the exercise price to exercise the option and get a share. Companies receive cash when employees exercise their options.

@jasoncollins7754 7 жыл бұрын

how do you account for future equity issuances (dilution) in a DCF? thanks

@financialmodeling 7 жыл бұрын

You don't. Ignore them. Otherwise the analysis gets more complicated and confusing because you have to take the PV all those future share issuances, divide by the share price, increase the company's current share count etc. etc. and it's just easier to leave them out.

@jasoncollins7754 7 жыл бұрын

thanks!

@KrishanSingh-gz9op 2 жыл бұрын

Can I calculate stock price by adding shares involved in stock options to the total diluted shares. i.e value of share = value of equity (calculated using DCF)/ (Shares outstanding + total shares in stock options)

@financialmodeling 2 жыл бұрын

You use the Treasury Stock Method or If-Converted Method to estimate dilution from stock options, warrants, convertibles, etc., depending on whether it's an all-or-nothing scale or a gradient.

@mindsetwarrior. Жыл бұрын

Can you provide resource material

@financialmodeling Жыл бұрын

??? I'm not sure I understand your question. If you want the files and resources, click "Show More" or "More" below the video.

@lorenzogranatelli3337 7 жыл бұрын

References?

@financialmodeling 7 жыл бұрын

References as in books or textbooks? This topic is way too new, so there's nothing. Damodaran has written about it before and pointed out the same thing we did here. If you Google his name and the topic, you can find some papers or articles from him.