CFIDCF Valuation Practice Exam – Advanced Edition
Question 1
A company generated Unlevered Free Cash Flow (UFCF) of $20 million in Year 5. UFCF is
expected to grow at 3% perpetually after Year 5. If the WACC is 8%, what is the Terminal
Value at the end of Year 5 using the Gordon Growth Method?
A. $343.3 million
B. $412.0 million
C. $400.0 million
D. $500.0 million
Answer: B
Explanation:
UFCF₆ = 20 × (1 + 0.03) = 20.6
Terminal Value = UFCF₆ ÷ (WACC − g)
= 20.6 ÷ (0.08 − 0.03)
= 20.6 ÷ 0.05
= $412.0 million
Question 2
A firm's cost of equity is calculated using CAPM.
Risk-Free Rate = 4%
Beta = 1.4
Market Risk Premium = 6%
What is the Cost of Equity?
A. 10.4%
B. 11.2%
C. 12.4%
D. 13.8%
Answer: C
Explanation:
Cost of Equity = Risk-Free Rate + Beta × Market Risk Premium
= 4% + (1.4 × 6%)
= 4% + 8.4%
= 12.4%
Question 3
Which of the following increases Enterprise Value in a DCF model?
A. Higher WACC
B. Lower Free Cash Flow
C. Higher Terminal Growth Rate
D. Higher Tax Rate
Answer: C
Explanation:
Generally higher terminal growth rate increases terminal value, which generally increases
Enterprise Value.
Question 4
A company has:
Enterprise Value = $900 million
Cash = $100 million
Debt = $250 million
Question 1
A company generated Unlevered Free Cash Flow (UFCF) of $20 million in Year 5. UFCF is
expected to grow at 3% perpetually after Year 5. If the WACC is 8%, what is the Terminal
Value at the end of Year 5 using the Gordon Growth Method?
A. $343.3 million
B. $412.0 million
C. $400.0 million
D. $500.0 million
Answer: B
Explanation:
UFCF₆ = 20 × (1 + 0.03) = 20.6
Terminal Value = UFCF₆ ÷ (WACC − g)
= 20.6 ÷ (0.08 − 0.03)
= 20.6 ÷ 0.05
= $412.0 million
Question 2
A firm's cost of equity is calculated using CAPM.
Risk-Free Rate = 4%
Beta = 1.4
Market Risk Premium = 6%
What is the Cost of Equity?
A. 10.4%
B. 11.2%
C. 12.4%
D. 13.8%
Answer: C
Explanation:
Cost of Equity = Risk-Free Rate + Beta × Market Risk Premium
= 4% + (1.4 × 6%)
= 4% + 8.4%
= 12.4%
Question 3
Which of the following increases Enterprise Value in a DCF model?
A. Higher WACC
B. Lower Free Cash Flow
C. Higher Terminal Growth Rate
D. Higher Tax Rate
Answer: C
Explanation:
Generally higher terminal growth rate increases terminal value, which generally increases
Enterprise Value.
Question 4
A company has:
Enterprise Value = $900 million
Cash = $100 million
Debt = $250 million
