Series 79 practice questionmediumDCF Analysis
How should stock-based compensation be treated when calculating unlevered free cash flow for a DCF?
- AExclude it from all calculations
- BTreat it as a cash expense
- CAdd it back as a non-cash expense✓ Correct answer
- DOnly deduct it if paid in cash
Explanation
Why C — Add it back as a non-cash expense
Stock-based compensation is a non-cash expense and is added back to arrive at free cash flow. Treating it as a cash cost is a common mistake, leading to understated value.
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