BIWS DCF Exam Questions with Correct Answers| New Update 100% Verified by Experts
What is a DCF? Based off the idea that the intrinsic value of an asset (in this case a company)
is equal to the present value of its future cashflows (free cash flows)
You divide a firm's future cashflows into a "near future" period of 5-10 years and a "far future"
period for everything beyond that which is too far to project accurately but can be
approximated using various methods
The sum of these future cashflows is then discounted back to today's value to give an
approximate value of the company
Time Value of Money The idea that money today is worth more than money in the future
because today you could invest that money, earn interest on it, and end up with more
tomorrow
Walk me through a DCF 1. Project the companies financials and use them to calculate free
cash flows for 5 to 10 years in the future, depending on the stability and nature of the company
2. Calculate the firm's WACC and use it to discount the near-future cashflows to their present
value
3. Determine the terminal value of the company by either using the Multiples method or the
Gordon Growth method
4. Use the WACC again to discount the terminal/far future value back to present value
5. Add up the present value of the near-future cashflows and the terminal value to find an
enterprise value.
, 6. Subtract Net Debt (or add cash, subtract debt, subtract preferred stock, subtract non-
controlling interest, subtract any other debt-like items) to find an equity value, then divide by
diluted shares outstanding to find an implied share price
How do you find Free Cash Flow from Revenue? ASK IF THEY ARE LOOKING FOR UNLEVERED
FREE CASH FLOW (FCF to Firm)
(Unlevered)
Subtract COGS & subtract operating expenses OR multiply by an EBIT margin to find Operating
Income (EBIT). Multiply by (1-Tax Rate) to get Net Income. Add back non-cash expenses such as
Depreciation & Amortization. Add/Subtract changes in Working Capital using basic cashflow
rules (asset up is outflow, liability up is inflow). Subtract Capital Expenditures.
Shortcut: Cashflow from Operations + Capex
(Levered)
Same but you subtract net interest expenses before multiplying by (1-Tax Rate), you also have
to deduct Mandatory Debt Repayments at the end
Why Free Cash Flow? Because we want to replicate the cash flow statement but only with
recurring predictable items. In the case of Unlevered FCF you exclude the impact of debt
entirely. This is why everything in 'Investing' is excluded but CapEx, and why everything in
'Financing' is excluded but mandatory debt repayments in Levered FCF
Why 5-10 years for near-future DCF projections? Less than that time frame is too short to be
useful, and more than that is too difficult to project for most companies
When would you project +10 years for near-future? If the firm is in a cyclical industry
because it would be important because you would want to incorporate the entire business
cycle from low to high
What is a DCF? Based off the idea that the intrinsic value of an asset (in this case a company)
is equal to the present value of its future cashflows (free cash flows)
You divide a firm's future cashflows into a "near future" period of 5-10 years and a "far future"
period for everything beyond that which is too far to project accurately but can be
approximated using various methods
The sum of these future cashflows is then discounted back to today's value to give an
approximate value of the company
Time Value of Money The idea that money today is worth more than money in the future
because today you could invest that money, earn interest on it, and end up with more
tomorrow
Walk me through a DCF 1. Project the companies financials and use them to calculate free
cash flows for 5 to 10 years in the future, depending on the stability and nature of the company
2. Calculate the firm's WACC and use it to discount the near-future cashflows to their present
value
3. Determine the terminal value of the company by either using the Multiples method or the
Gordon Growth method
4. Use the WACC again to discount the terminal/far future value back to present value
5. Add up the present value of the near-future cashflows and the terminal value to find an
enterprise value.
, 6. Subtract Net Debt (or add cash, subtract debt, subtract preferred stock, subtract non-
controlling interest, subtract any other debt-like items) to find an equity value, then divide by
diluted shares outstanding to find an implied share price
How do you find Free Cash Flow from Revenue? ASK IF THEY ARE LOOKING FOR UNLEVERED
FREE CASH FLOW (FCF to Firm)
(Unlevered)
Subtract COGS & subtract operating expenses OR multiply by an EBIT margin to find Operating
Income (EBIT). Multiply by (1-Tax Rate) to get Net Income. Add back non-cash expenses such as
Depreciation & Amortization. Add/Subtract changes in Working Capital using basic cashflow
rules (asset up is outflow, liability up is inflow). Subtract Capital Expenditures.
Shortcut: Cashflow from Operations + Capex
(Levered)
Same but you subtract net interest expenses before multiplying by (1-Tax Rate), you also have
to deduct Mandatory Debt Repayments at the end
Why Free Cash Flow? Because we want to replicate the cash flow statement but only with
recurring predictable items. In the case of Unlevered FCF you exclude the impact of debt
entirely. This is why everything in 'Investing' is excluded but CapEx, and why everything in
'Financing' is excluded but mandatory debt repayments in Levered FCF
Why 5-10 years for near-future DCF projections? Less than that time frame is too short to be
useful, and more than that is too difficult to project for most companies
When would you project +10 years for near-future? If the firm is in a cyclical industry
because it would be important because you would want to incorporate the entire business
cycle from low to high
