Series 79 practice questionhardDCF Analysis
A company has $100 million in NOLs (net operating losses). In your DCF, which is the correct way to reflect the value of these NOLs?
- AIgnore NOLs, as they are non-cash
- BAdd NOLs to terminal value only
- CReduce forecasted taxes to the extent NOLs offset taxable income✓ Correct answer
- DDeduct NOLs from free cash flow
Explanation
Why C — Reduce forecasted taxes to the extent NOLs offset taxable income
NOLs offset future taxable income, reducing cash taxes paid and thus increasing free cash flow. Misapplying NOLs can significantly misstate valuation.
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