BIWS DCF Exam Questions with Correct Answers| New Update 100% Verified by Experts
When you walk through a DCF in interviews, you should divide it into steps and say something
like this: "In a DCF analysis, you value a company with the Present Value of its Free Cash
Flows plus the Present Value of its Terminal Value. You can divide the process into 6 steps:
1. Project a company's Free Cash Flows over a 5-10 year period.
2. Calculate the company's Discount Rate, usually using WACC (Weighted Average Cost of
Capital).
3. Discount and sum up the company's Free Cash Flows.
4. Calculate the company's Terminal Value.
5. Discount the Terminal Value to its Present Value.
6. Add the discounted Free Cash Flows to the discounted Terminal Value."
How do you project Free Cash Flow? The first step is to decide which kind of Free Cash Flow you
need: Unlevered FCF (Free Cash Flow to Firm), which excludes net interest expense and
mandatory debt repayments, or
Levered FCF (Free Cash Flow to Equity), which includes net interest expense and mandatory
debt repayments.
99% of the time you care about Unlevered FCF, which is good news because it's much easier to
calculate.
rules to calculate CF changes: Change in Operating Assets and Liabilities, otherwise known as
the Change in Working Capital or Change in Operating Working Capital. • If an Asset goes
up, cash flow goes down...
• If an Asset goes down, cash flow goes up...
• If a Liability goes up, cash flow goes up...
• If a Liability goes down, cash flow goes down
, formula for Unlevered free cash flow (FCFF) EBIT * (1-T)
+ D & A (add back non cash expenses, depreciation and am)
- net increase in working capital (+ net decrease in working capital)
- Capex
+ other relevant cash flows from an all equity firm
note:
increase in working capital means:
(increase in current assets > increase in current liabilities)
decrease in working capital means:
(increase in current assets < increase in current liabilities)
how to calculate FCFF (unlevered) step by step 1. first project the companies revenue
growth rate (for the coming 5-10 years)
2. then assume an operating margin (% of revenue) to calculate EBIT (aka operating income) for
each year (revenue x operating margin = EBIT)
3. apply tax rate to calculate NOPAT (EBIT x (1-T))
4. now move to the cash flow statement, add back non-cash charges (main ones are
depreciation and amortization)
5. Next you estimate the change in Operating Assets and Liabilities. What this really means is,
"If the company's Operating Assets increase more than its Operating Liabilities, it needs extra
cash to fund that... so it reduces cash flow. If its Liabilities increase more, that adds to cash
flow." You can make this a percentage of revenue as well.
6. estimate and subtract CapEx you might average previous years' numbers, assume a constant
change, or make it a percentage of revenue. It always reduces cash flow.
Explain what is done in the calculation of the FCFF (unlevered) (hint; it's basically replicating a
cash flow statement 7. So it basically is replicating the cash flow statement, but excluding
interest, debt repayments, and everything in Cash Flow from Financing.
When you walk through a DCF in interviews, you should divide it into steps and say something
like this: "In a DCF analysis, you value a company with the Present Value of its Free Cash
Flows plus the Present Value of its Terminal Value. You can divide the process into 6 steps:
1. Project a company's Free Cash Flows over a 5-10 year period.
2. Calculate the company's Discount Rate, usually using WACC (Weighted Average Cost of
Capital).
3. Discount and sum up the company's Free Cash Flows.
4. Calculate the company's Terminal Value.
5. Discount the Terminal Value to its Present Value.
6. Add the discounted Free Cash Flows to the discounted Terminal Value."
How do you project Free Cash Flow? The first step is to decide which kind of Free Cash Flow you
need: Unlevered FCF (Free Cash Flow to Firm), which excludes net interest expense and
mandatory debt repayments, or
Levered FCF (Free Cash Flow to Equity), which includes net interest expense and mandatory
debt repayments.
99% of the time you care about Unlevered FCF, which is good news because it's much easier to
calculate.
rules to calculate CF changes: Change in Operating Assets and Liabilities, otherwise known as
the Change in Working Capital or Change in Operating Working Capital. • If an Asset goes
up, cash flow goes down...
• If an Asset goes down, cash flow goes up...
• If a Liability goes up, cash flow goes up...
• If a Liability goes down, cash flow goes down
, formula for Unlevered free cash flow (FCFF) EBIT * (1-T)
+ D & A (add back non cash expenses, depreciation and am)
- net increase in working capital (+ net decrease in working capital)
- Capex
+ other relevant cash flows from an all equity firm
note:
increase in working capital means:
(increase in current assets > increase in current liabilities)
decrease in working capital means:
(increase in current assets < increase in current liabilities)
how to calculate FCFF (unlevered) step by step 1. first project the companies revenue
growth rate (for the coming 5-10 years)
2. then assume an operating margin (% of revenue) to calculate EBIT (aka operating income) for
each year (revenue x operating margin = EBIT)
3. apply tax rate to calculate NOPAT (EBIT x (1-T))
4. now move to the cash flow statement, add back non-cash charges (main ones are
depreciation and amortization)
5. Next you estimate the change in Operating Assets and Liabilities. What this really means is,
"If the company's Operating Assets increase more than its Operating Liabilities, it needs extra
cash to fund that... so it reduces cash flow. If its Liabilities increase more, that adds to cash
flow." You can make this a percentage of revenue as well.
6. estimate and subtract CapEx you might average previous years' numbers, assume a constant
change, or make it a percentage of revenue. It always reduces cash flow.
Explain what is done in the calculation of the FCFF (unlevered) (hint; it's basically replicating a
cash flow statement 7. So it basically is replicating the cash flow statement, but excluding
interest, debt repayments, and everything in Cash Flow from Financing.
