400 IB DCF EXAM QUESTIONS AND
ANSWERS 100% CORRECT.
Why do you have to unlevered and relevered Beta? - ANSWERBecause you want to
look at how risky a company is regardless of what % of debt or equity it has. To get that,
you need to un-lever beta each time you get it from bloomberg, but then you need to
relever it so it can be used in the cost of equity calculation.
Would you expect a manufacturing company or a technology company to have a higher
beta? - ANSWERProbably a technology company because its viewed as a riskier
industry
Walk me through how you get from Revenue to Free Cash Flow Projection? -
ANSWERFirst you take Revenue and Subtract COGS and Operating Expense to get to
Operating Income (EBIT). Then multiply by (1-tax rate) and add back depreciation and
amortization. Finally subtract capex and account for change in working capital.
What's an alternative way to calculate Free Cash Flow aside from taking Net Income,
adding back Depreciation, and subtracting Changes in Operating Asset/Liabilities and
Capex? - ANSWERTake cashflow from operations and subtract capex which get you
levered cash flow. To get to unlevered cash flow, you add back the tax adjusted interest
expense and subtract the tax-adjusted interest income
Why do you use 5 or 10 years for DCF projections? - ANSWERUsually about as far as
you can reasonably predict into the future.
How do you get to Beta in Cost of Equity Calculation? - ANSWERLook up Beta for each
comparable company, un-lever each one, take the median of the set and lever it based
on your company's capital structure
If you use levered free cash flow, what should you use as the discount rate? -
ANSWERYou would use the Cost of Equity rather than WACC since you wouldn't be
concerned with debt or preferred stock
How do you calculate Terminal Value - ANSWERYou can either apply an exit multiple to
a company's year 5 EBITDA, EBIT or Free Cash Flow
(Year 5 free Cash Flow * (1-discount rate))/(discount rate-growth rate)
Why would you use Gordon Growth rather than the Multiple Method to calculate the
terminal value? - ANSWERIn banks, you always use Multiple methods because getting
appropriate data for exit multiple is much easier as they are based on comparable
companies while picking a long-term growth rate is always a shot in the dark. You might
ANSWERS 100% CORRECT.
Why do you have to unlevered and relevered Beta? - ANSWERBecause you want to
look at how risky a company is regardless of what % of debt or equity it has. To get that,
you need to un-lever beta each time you get it from bloomberg, but then you need to
relever it so it can be used in the cost of equity calculation.
Would you expect a manufacturing company or a technology company to have a higher
beta? - ANSWERProbably a technology company because its viewed as a riskier
industry
Walk me through how you get from Revenue to Free Cash Flow Projection? -
ANSWERFirst you take Revenue and Subtract COGS and Operating Expense to get to
Operating Income (EBIT). Then multiply by (1-tax rate) and add back depreciation and
amortization. Finally subtract capex and account for change in working capital.
What's an alternative way to calculate Free Cash Flow aside from taking Net Income,
adding back Depreciation, and subtracting Changes in Operating Asset/Liabilities and
Capex? - ANSWERTake cashflow from operations and subtract capex which get you
levered cash flow. To get to unlevered cash flow, you add back the tax adjusted interest
expense and subtract the tax-adjusted interest income
Why do you use 5 or 10 years for DCF projections? - ANSWERUsually about as far as
you can reasonably predict into the future.
How do you get to Beta in Cost of Equity Calculation? - ANSWERLook up Beta for each
comparable company, un-lever each one, take the median of the set and lever it based
on your company's capital structure
If you use levered free cash flow, what should you use as the discount rate? -
ANSWERYou would use the Cost of Equity rather than WACC since you wouldn't be
concerned with debt or preferred stock
How do you calculate Terminal Value - ANSWERYou can either apply an exit multiple to
a company's year 5 EBITDA, EBIT or Free Cash Flow
(Year 5 free Cash Flow * (1-discount rate))/(discount rate-growth rate)
Why would you use Gordon Growth rather than the Multiple Method to calculate the
terminal value? - ANSWERIn banks, you always use Multiple methods because getting
appropriate data for exit multiple is much easier as they are based on comparable
companies while picking a long-term growth rate is always a shot in the dark. You might
