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Why did the analysts add back stock expenses to get to free cash flows?

Why did the analysts add back stock expenses to get to free cash flows?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Why did the analysts add back stock expenses to get to free cash flows?

Before the offer, Microsoft created the following discounted cash flow valuation of LinkedIn. in US $ Thousands Net Revenue Cost of Revenue Gross Profit Sales and Marketing Product Development General and Administrative Depreciation and Amortization Operating Income Free Cash Flow (FCF) EBIT Less Taxes (35% tax rate) Add Depreciation & Amortization Add Stock Expense Less Capital Expenditures Less Intangibles Unlevered Free Cash Flow Present Value (WACC of 10%) FY 16E 3,742,464 (500,860) (599,430) (671,042) 3,241,604 3,970,961 4,714,643 (132,283) (132,283) 46,299 (550,640) (587,919) (595,995) 550,640 580,398 FY 17E (542,094) (612,367) (667,484) (719,033) 4,570,391 (8,308) 326,826 326,826 (1,276,256) (1,535,216) (1,781,941) (2,044,070) (2,319,453) (2,605,850) (2,898,763) (3,197,823) Total PV of Unlevered Free 27,184,735 Cash Flow (1,004,897) (1,178,117) (1,332,746) (1,489,994) (1,647,819) (1,785,504) (1,915,629) (2,038,170) Terminal Value Assumptions: Growth: 4.6% WACC: 10% 57,342 FY 18E 57,342 5,385,685 587,919 594,908 (709,920) (727,668) (654,901) 492,431 447,665 336,477 336,477 595,995 FY 19E (20,070) (117,767) (232,547) 609,781 6,272,014 769,585 636,020 10,423,675 (742,402) (812,487) (880,375) (974,363) (1,069,430) 5,529,612 6,412,894 7,360,785 8,332,756 9,354,245 664,421 664,421 (612,094) (637,107) 612,094 FY 20E 625,025 (671,274) 997,719 7,225,381 8,241,160 749,601 FY 21E (766,204) (808,377) (844,466) (874,842) 637,107 FY 22E 640,651 9,307,119 1,042,311 1,496,661 1,982,547 2,526,239 1,042,311 1,496,661 1,982,547 2,526,239 (523,831) (693,892) (884,183) (364,808) 865,517 (664,393) (691,351) (717,171) 664,393 656,667 FY 23E 1,267,205 1,588,633 691,351 (688,056) (705,257) (722,888) 673,084 1,930,202 717,171 689,911 (740,961) 2,308,177 Terminal Value 986,416 1,089,549 1,184,459 20,898,681
Transcribed Image Text:Before the offer, Microsoft created the following discounted cash flow valuation of LinkedIn. in US $ Thousands Net Revenue Cost of Revenue Gross Profit Sales and Marketing Product Development General and Administrative Depreciation and Amortization Operating Income Free Cash Flow (FCF) EBIT Less Taxes (35% tax rate) Add Depreciation & Amortization Add Stock Expense Less Capital Expenditures Less Intangibles Unlevered Free Cash Flow Present Value (WACC of 10%) FY 16E 3,742,464 (500,860) (599,430) (671,042) 3,241,604 3,970,961 4,714,643 (132,283) (132,283) 46,299 (550,640) (587,919) (595,995) 550,640 580,398 FY 17E (542,094) (612,367) (667,484) (719,033) 4,570,391 (8,308) 326,826 326,826 (1,276,256) (1,535,216) (1,781,941) (2,044,070) (2,319,453) (2,605,850) (2,898,763) (3,197,823) Total PV of Unlevered Free 27,184,735 Cash Flow (1,004,897) (1,178,117) (1,332,746) (1,489,994) (1,647,819) (1,785,504) (1,915,629) (2,038,170) Terminal Value Assumptions: Growth: 4.6% WACC: 10% 57,342 FY 18E 57,342 5,385,685 587,919 594,908 (709,920) (727,668) (654,901) 492,431 447,665 336,477 336,477 595,995 FY 19E (20,070) (117,767) (232,547) 609,781 6,272,014 769,585 636,020 10,423,675 (742,402) (812,487) (880,375) (974,363) (1,069,430) 5,529,612 6,412,894 7,360,785 8,332,756 9,354,245 664,421 664,421 (612,094) (637,107) 612,094 FY 20E 625,025 (671,274) 997,719 7,225,381 8,241,160 749,601 FY 21E (766,204) (808,377) (844,466) (874,842) 637,107 FY 22E 640,651 9,307,119 1,042,311 1,496,661 1,982,547 2,526,239 1,042,311 1,496,661 1,982,547 2,526,239 (523,831) (693,892) (884,183) (364,808) 865,517 (664,393) (691,351) (717,171) 664,393 656,667 FY 23E 1,267,205 1,588,633 691,351 (688,056) (705,257) (722,888) 673,084 1,930,202 717,171 689,911 (740,961) 2,308,177 Terminal Value 986,416 1,089,549 1,184,459 20,898,681
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