Module II· DCF — Mechanics & FCFIntermediate
Question
How do you treat stock-based compensation (SBC) in a DCF?
Answer
Mechanics
Two approaches to SBC in a DCF:
- Cash-based: SBC is non-cash, so add it back like D&A — but shares are issued later, diluting the share count at the end. Reflect SBC × forecast years as an equity-value deduction, or via the treasury-stock method in the share count.
- Run-rate cost: treat SBC as a real expense (do not add it back), because it costs real economic value.
Market standard
approach 2 is the standard today at US tech (Apple, Adobe). Rarely relevant for middle-market companies — most have no SBC programs.