Wall Street DCF Exam Questions and
Answers7
How do you estimate a company's discount rate? - ANSWERS-by separating its capital structure
into components--normally equity, debt, and preferred stock--and calculating the cost of each
one
the 'costs' of debts and preferred stock are simple and intuitive: - ANSWERS-you use the interest
rate on debt or the effective yield on preferred stock (ex: if its a $100 million issuance and pays
$7 million.in preferred dividends each year, its 7%)
Interest rate on debt = - ANSWERS-cost of debt (for interview purposes)
How does issuing equity 'cost' a company anything? - ANSWERS-1. if a company issues
dividends to common shareholders, that is an actual cash expense
2. by issuing Equity to other parties, the company is giving up future stock price appreciation to
someone else rather than keeping it for itself
The cost of equity is hard to estimate because - ANSWERS-the company's share price changes
over time, so u cannot just assume a certain dividend yield and base everything on that
What is the equation that you would normally use to estimate the cost of equity? - ANSWERS-
Cost of equity = Risk-free rate + Equity Risk Premium * Levered Beta
The basic concept of a Discounted cash flow analysis is that a company is - ANSWERS-worth the
present value of its future cash flows
, how do you account for the time value of money - ANSWERS-discount all futures cash flows
back to their present value
wha are the two part of a dcf? - ANSWERS-the projection period (the near future) and the
terminal value ( the distant future)
an approximation of how much the company might be worth in the distant future - ANSWERS-
terminal value
what is the basic concept of a dcf? - ANSWERS-divide a company's cash flows into "near future"
period and then a "distant future" period, determine the values for each period, and then
discount them back to their present values
Walk through a DCF (intro and 6 steps) - ANSWERS-"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 period
2. Calculate the company's discount rate, usually using WACC
3. Discount and sum up the company's Free Cash Flows
4. Calculate the companies terminal value
5. discount the terminal value back to its present value
6. Add the discounted free cash flows to the discounted terminal value
WACC - ANSWERS-Weighted average cost of capital. The average cost of financing a firm in
percentage terms
what does free cash flow mean? - ANSWERS-how much after-tax cash flow the company
generates on a RECURRING basis, after you have taken into account non-cash charges, changes
in Operating Assets and Liabilities, and required Capital Expenditures
Answers7
How do you estimate a company's discount rate? - ANSWERS-by separating its capital structure
into components--normally equity, debt, and preferred stock--and calculating the cost of each
one
the 'costs' of debts and preferred stock are simple and intuitive: - ANSWERS-you use the interest
rate on debt or the effective yield on preferred stock (ex: if its a $100 million issuance and pays
$7 million.in preferred dividends each year, its 7%)
Interest rate on debt = - ANSWERS-cost of debt (for interview purposes)
How does issuing equity 'cost' a company anything? - ANSWERS-1. if a company issues
dividends to common shareholders, that is an actual cash expense
2. by issuing Equity to other parties, the company is giving up future stock price appreciation to
someone else rather than keeping it for itself
The cost of equity is hard to estimate because - ANSWERS-the company's share price changes
over time, so u cannot just assume a certain dividend yield and base everything on that
What is the equation that you would normally use to estimate the cost of equity? - ANSWERS-
Cost of equity = Risk-free rate + Equity Risk Premium * Levered Beta
The basic concept of a Discounted cash flow analysis is that a company is - ANSWERS-worth the
present value of its future cash flows
, how do you account for the time value of money - ANSWERS-discount all futures cash flows
back to their present value
wha are the two part of a dcf? - ANSWERS-the projection period (the near future) and the
terminal value ( the distant future)
an approximation of how much the company might be worth in the distant future - ANSWERS-
terminal value
what is the basic concept of a dcf? - ANSWERS-divide a company's cash flows into "near future"
period and then a "distant future" period, determine the values for each period, and then
discount them back to their present values
Walk through a DCF (intro and 6 steps) - ANSWERS-"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 period
2. Calculate the company's discount rate, usually using WACC
3. Discount and sum up the company's Free Cash Flows
4. Calculate the companies terminal value
5. discount the terminal value back to its present value
6. Add the discounted free cash flows to the discounted terminal value
WACC - ANSWERS-Weighted average cost of capital. The average cost of financing a firm in
percentage terms
what does free cash flow mean? - ANSWERS-how much after-tax cash flow the company
generates on a RECURRING basis, after you have taken into account non-cash charges, changes
in Operating Assets and Liabilities, and required Capital Expenditures
