Series 79 practice questionmediumDCF Analysis
When building a DCF, how should net operating losses (NOLs) most accurately be reflected in the forecast period?
- AIgnored, as they do not impact cash flows
- BAdded back to EBITDA
- CUsed to reduce forecast taxes paid✓ Correct answer
- DIncluded in terminal value only
Explanation
Why C — Used to reduce forecast taxes paid
NOLs reduce taxable income in the forecast period, lowering cash taxes paid and increasing free cash flow. Failing to include NOL effects understates cash flows and can undervalue the business.
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