DCF CERTIFICATION PREP 2026/2027 200 ESSENTIAL
QUESTIONS & ANSWERS FOR FINANCIAL ANALYSTS &
FLORIDA CHILD CARE PROFESSIONALS
Question 1: According to the Discounted Cash Flow (DCF)
methodology, which of the following best defines the discount rate
used to calculate the present value of future cash flows?
A. The company's historical average return on equity
B. The risk-free rate of return on a 10-year government bond
C. The current inflation rate as measured by the Consumer Price Index
D. The opportunity cost of capital, reflecting the riskiness of the
projected cash flows
CORRECT ANSWER: D
Rationale: The discount rate in a DCF analysis represents the required
rate of return for investors, given the risk of the investment. It is the
opportunity cost of capital, often calculated using the Weighted
Average Cost of Capital (WACC), which incorporates both the cost of
equity and the cost of debt, adjusted for the company's specific risk
profile.
Question 2: In a DCF valuation, Free Cash Flow to the Firm (FCFF) is
typically calculated as:
A. Cash from Operations - Capital Expenditures + Interest Expense
B. EBITDA - Taxes - Capital Expenditures - Change in Working Capital
,C. Net Income + Depreciation - Capital Expenditures - Change in
Working Capital
D. Operating Income (EBIT) × (1 - Tax Rate) + Depreciation &
Amortization - Capital Expenditures - Change in Working Capital
CORRECT ANSWER: D
Rationale: FCFF starts with Earnings Before Interest and Taxes (EBIT),
adjusts for taxes to get Net Operating Profit After Taxes (NOPAT), then
adds back non-cash charges (D&A), and subtracts capital expenditures
and increases in working capital to reflect the cash available to all
capital providers (debt and equity).
Question 3: Why is the Weighted Average Cost of Capital (WACC) used
as the discount rate for FCFF rather than the cost of equity?
A. Because WACC excludes the impact of taxes, simplifying the valuation
process.
B. Because WACC is always lower than the cost of equity, leading to a
higher valuation.
C. Because WACC is easier to calculate than the cost of equity using the
Capital Asset Pricing Model (CAPM).
D. Because FCFF represents cash flows available to both debt and equity
holders, and WACC reflects the blended cost of all capital sources.
CORRECT ANSWER: D
Rationale: FCFF is the cash flow generated by the firm that is available
to all investors—both bondholders and shareholders. Therefore, the
appropriate discount rate is the blended cost of capital (WACC), which
accounts for the proportional costs of debt, equity, and preferred stock.
,Question 4: A company has a total debt of $50 million, equity of $150
million, a cost of debt of 5%, a cost of equity of 12%, and a tax rate of
25%. What is its Weighted Average Cost of Capital (WACC)?
A. 10.25%
B. 9.75%
C. 9.45%
D. 10.00%
CORRECT ANSWER: B
Rationale: Weights are Debt = 50/200 = 25%, Equity = 150/200 = 75%.
After-tax cost of debt = 5% × (1 - 25%) = 3.75%. WACC = (75% × 12%) +
(25% × 3.75%) = 9% + 0.9375% = 9.9375%, which is approximately
9.75%.
Question 5: In a DCF model, a terminal value represents:
A. The value of the company's equity at the end of the projection
period.
B. The present value of all cash flows expected beyond the explicit
forecast period.
C. The liquidation value of the company at the end of the projection
period.
D. The value of the company's assets at the end of the projection
period, ignoring future growth.
CORRECT ANSWER: B
Rationale: Since it is impractical to forecast cash flows indefinitely, a
terminal value is calculated to capture the value of the company's cash
, flows into perpetuity beyond the explicit projection period. This often
represents a significant portion of the total enterprise value.
Question 6: The Gordon Growth Model is a common method used to
calculate terminal value. It requires the assumption that:
A. The growth rate of free cash flows will equal the historical growth
rate.
B. The growth rate of free cash flows will decline to zero after the
forecast period.
C. The growth rate of free cash flows will remain constant in perpetuity.
D. The growth rate of free cash flows will exceed the discount rate to
ensure a positive value.
CORRECT ANSWER: C
Rationale: The Gordon Growth Model (or Perpetuity Growth Model)
assumes that Free Cash Flows will grow at a constant, sustainable rate
forever. A key condition is that this growth rate must be less than the
discount rate (WACC).
Question 7: What is the formula for the perpetuity growth terminal
value?
A. TV = FCFn / (WACC - g)
B. TV = FCFn / (WACC + g)
C. TV = FCFn × (1 + g) / (WACC + g)
D. TV = FCFn × (1 + g) / (WACC - g)
QUESTIONS & ANSWERS FOR FINANCIAL ANALYSTS &
FLORIDA CHILD CARE PROFESSIONALS
Question 1: According to the Discounted Cash Flow (DCF)
methodology, which of the following best defines the discount rate
used to calculate the present value of future cash flows?
A. The company's historical average return on equity
B. The risk-free rate of return on a 10-year government bond
C. The current inflation rate as measured by the Consumer Price Index
D. The opportunity cost of capital, reflecting the riskiness of the
projected cash flows
CORRECT ANSWER: D
Rationale: The discount rate in a DCF analysis represents the required
rate of return for investors, given the risk of the investment. It is the
opportunity cost of capital, often calculated using the Weighted
Average Cost of Capital (WACC), which incorporates both the cost of
equity and the cost of debt, adjusted for the company's specific risk
profile.
Question 2: In a DCF valuation, Free Cash Flow to the Firm (FCFF) is
typically calculated as:
A. Cash from Operations - Capital Expenditures + Interest Expense
B. EBITDA - Taxes - Capital Expenditures - Change in Working Capital
,C. Net Income + Depreciation - Capital Expenditures - Change in
Working Capital
D. Operating Income (EBIT) × (1 - Tax Rate) + Depreciation &
Amortization - Capital Expenditures - Change in Working Capital
CORRECT ANSWER: D
Rationale: FCFF starts with Earnings Before Interest and Taxes (EBIT),
adjusts for taxes to get Net Operating Profit After Taxes (NOPAT), then
adds back non-cash charges (D&A), and subtracts capital expenditures
and increases in working capital to reflect the cash available to all
capital providers (debt and equity).
Question 3: Why is the Weighted Average Cost of Capital (WACC) used
as the discount rate for FCFF rather than the cost of equity?
A. Because WACC excludes the impact of taxes, simplifying the valuation
process.
B. Because WACC is always lower than the cost of equity, leading to a
higher valuation.
C. Because WACC is easier to calculate than the cost of equity using the
Capital Asset Pricing Model (CAPM).
D. Because FCFF represents cash flows available to both debt and equity
holders, and WACC reflects the blended cost of all capital sources.
CORRECT ANSWER: D
Rationale: FCFF is the cash flow generated by the firm that is available
to all investors—both bondholders and shareholders. Therefore, the
appropriate discount rate is the blended cost of capital (WACC), which
accounts for the proportional costs of debt, equity, and preferred stock.
,Question 4: A company has a total debt of $50 million, equity of $150
million, a cost of debt of 5%, a cost of equity of 12%, and a tax rate of
25%. What is its Weighted Average Cost of Capital (WACC)?
A. 10.25%
B. 9.75%
C. 9.45%
D. 10.00%
CORRECT ANSWER: B
Rationale: Weights are Debt = 50/200 = 25%, Equity = 150/200 = 75%.
After-tax cost of debt = 5% × (1 - 25%) = 3.75%. WACC = (75% × 12%) +
(25% × 3.75%) = 9% + 0.9375% = 9.9375%, which is approximately
9.75%.
Question 5: In a DCF model, a terminal value represents:
A. The value of the company's equity at the end of the projection
period.
B. The present value of all cash flows expected beyond the explicit
forecast period.
C. The liquidation value of the company at the end of the projection
period.
D. The value of the company's assets at the end of the projection
period, ignoring future growth.
CORRECT ANSWER: B
Rationale: Since it is impractical to forecast cash flows indefinitely, a
terminal value is calculated to capture the value of the company's cash
, flows into perpetuity beyond the explicit projection period. This often
represents a significant portion of the total enterprise value.
Question 6: The Gordon Growth Model is a common method used to
calculate terminal value. It requires the assumption that:
A. The growth rate of free cash flows will equal the historical growth
rate.
B. The growth rate of free cash flows will decline to zero after the
forecast period.
C. The growth rate of free cash flows will remain constant in perpetuity.
D. The growth rate of free cash flows will exceed the discount rate to
ensure a positive value.
CORRECT ANSWER: C
Rationale: The Gordon Growth Model (or Perpetuity Growth Model)
assumes that Free Cash Flows will grow at a constant, sustainable rate
forever. A key condition is that this growth rate must be less than the
discount rate (WACC).
Question 7: What is the formula for the perpetuity growth terminal
value?
A. TV = FCFn / (WACC - g)
B. TV = FCFn / (WACC + g)
C. TV = FCFn × (1 + g) / (WACC + g)
D. TV = FCFn × (1 + g) / (WACC - g)
