DISCOUNTED CASH FLOW MODEL EXAM
WALL STREET PREP LATEST 2025-2026
TREND QUESTIONS AND ANSWERS
What is the effect of using Levered FCF rather than Unlevered FCF in
your DCF? - Answer-Levered FCF gives you Equity Value, not
Enterprise Value (since the CF is only avail to Equity Investors - debt
investors have been paid with the interest)
If you use Levered Cash Flow, what should use as the Discount Rate? -
Answer-Cost of Equity (since Levered Cash Flow represents the Equity
Value)
How do you calculate Terminal Value? - Answer-1) MULTIPLES
METHOD = apply an exit multiple to the company's Year 5 EBITA,
EBIT, or FCF
2) Gordon Growth Method = estimate terminal value based on growth
rate into perpetuity
- Terminal Value = Year 5 FCF (1+g)/(WACC-g)
Why use Gordon Growth rather than Multiples Method to get Terminal
Value? - Answer-almost always use the Mutliples Method
- easier to get appropriate data for exit multiples since they are based on
comparable companies
- picking a long term growth rate can be a shot in the dark
, If using Gordon Growth method
- if you have no good Comparable Companies
- if you have reason to believe the multiples will change significantly in
the industry several years down he road (e.g. very cyclical)
What is an appropriate growth rate to use when calculating Terminal
value? - Answer-Country's long-term GDP growth rate (3.2% for US),
the rate of inflation (2% target), or something similarly conservative
for companies in mature economies, g > 5% would be aggressive since
most developed economies are growing < 5% / year
How do you select the appropriate Exit Multiple when calculating
Terminal Value? - Answer-pick median of the set from Comparable
Companies
always show a range of exit multiples and what the Terminal Value
looks like over that range (so if median of EBITDA multiple was 8x,
show range of 6x-10x)
which method of calculating Terminal Value will give a higher
valuation? - Answer-both are very dependent on the generalizations you
make
Multiples Method will be more variable than Gordon Growth methods
because exit multiples tend to span a wider range than possible LT
growth rates
WALL STREET PREP LATEST 2025-2026
TREND QUESTIONS AND ANSWERS
What is the effect of using Levered FCF rather than Unlevered FCF in
your DCF? - Answer-Levered FCF gives you Equity Value, not
Enterprise Value (since the CF is only avail to Equity Investors - debt
investors have been paid with the interest)
If you use Levered Cash Flow, what should use as the Discount Rate? -
Answer-Cost of Equity (since Levered Cash Flow represents the Equity
Value)
How do you calculate Terminal Value? - Answer-1) MULTIPLES
METHOD = apply an exit multiple to the company's Year 5 EBITA,
EBIT, or FCF
2) Gordon Growth Method = estimate terminal value based on growth
rate into perpetuity
- Terminal Value = Year 5 FCF (1+g)/(WACC-g)
Why use Gordon Growth rather than Multiples Method to get Terminal
Value? - Answer-almost always use the Mutliples Method
- easier to get appropriate data for exit multiples since they are based on
comparable companies
- picking a long term growth rate can be a shot in the dark
, If using Gordon Growth method
- if you have no good Comparable Companies
- if you have reason to believe the multiples will change significantly in
the industry several years down he road (e.g. very cyclical)
What is an appropriate growth rate to use when calculating Terminal
value? - Answer-Country's long-term GDP growth rate (3.2% for US),
the rate of inflation (2% target), or something similarly conservative
for companies in mature economies, g > 5% would be aggressive since
most developed economies are growing < 5% / year
How do you select the appropriate Exit Multiple when calculating
Terminal Value? - Answer-pick median of the set from Comparable
Companies
always show a range of exit multiples and what the Terminal Value
looks like over that range (so if median of EBITDA multiple was 8x,
show range of 6x-10x)
which method of calculating Terminal Value will give a higher
valuation? - Answer-both are very dependent on the generalizations you
make
Multiples Method will be more variable than Gordon Growth methods
because exit multiples tend to span a wider range than possible LT
growth rates
