DISCOUNTED CASH FLOW MODEL EXAM
WALL STREET PREP LATEST 2025-2026 UPDATE
QUESTIONS AND ANSWERS
Which would you expect to have a higher beta a tech company or a
manufacturing company? - Answer-A technology company because the
technology industry is seen as riskier then the manufacturing industry
What is the effect of using levered cash flow vs unlevered cash flow in
your DCF? - Answer-Levered cash flow gives you equity value rather
than enterprise value since the cash flow is only available to equity
investors (debt investors have already been paid with interest payments)
If you use levered FCF what should you use as the discount rate? -
Answer-You would use the cost of equity rather than the WACC since
we are not concerned with the debt or preferred stock in this case
How do you calculate terminal value? - Answer-You can either use the
multiples method in which you apply an exit multiple to the company's
year 5 EBITDA, EBIT or FCF or you can use the Gordon Growth
method to estimate its value based on its growth rate into perpetuity
, Gordon Growth Method equation: - Answer-Terminal value= year 5
FCF*(1+growth rate)/(discount rate- growth rate)
Why would you use the Gordon Method over the multiples method -
Answer-In banking, you almost always use the multiples method as it is
much easier to get data on exit multiples since they are based on
comparable companies.Picking a long term growth rate is always a shot
in the dark. You might use the GGM if you have no good comparables.
What is an appropriate growth rate to use for terminal value - Answer-
Typically the nation's long term GDP growth rate, rate of inflation or
something similar that is conservative. Anything over 5% would be seen
as very aggressive.
How do you select appropriate exit multiples when calculating Terminal
Value? - Answer-Normally you look at comparable companies and pick
the median of the set. You would want to select a range of exit multiples
and show what the TV looks like over that range. For example if the
median EBITDA multiple is 8x you would want to show all TV from 6x
to 10x
Which method of calculating terminal value will give you a higher
valuation? - Answer-Both are highly dependent on the assumptions you
make, but typically the multiples method because exit multiples span a
larger range than long-term growth rates
What is the flaw in basing terminal multiples on what public
comparables are trading at? - Answer-The median multiples could
WALL STREET PREP LATEST 2025-2026 UPDATE
QUESTIONS AND ANSWERS
Which would you expect to have a higher beta a tech company or a
manufacturing company? - Answer-A technology company because the
technology industry is seen as riskier then the manufacturing industry
What is the effect of using levered cash flow vs unlevered cash flow in
your DCF? - Answer-Levered cash flow gives you equity value rather
than enterprise value since the cash flow is only available to equity
investors (debt investors have already been paid with interest payments)
If you use levered FCF what should you use as the discount rate? -
Answer-You would use the cost of equity rather than the WACC since
we are not concerned with the debt or preferred stock in this case
How do you calculate terminal value? - Answer-You can either use the
multiples method in which you apply an exit multiple to the company's
year 5 EBITDA, EBIT or FCF or you can use the Gordon Growth
method to estimate its value based on its growth rate into perpetuity
, Gordon Growth Method equation: - Answer-Terminal value= year 5
FCF*(1+growth rate)/(discount rate- growth rate)
Why would you use the Gordon Method over the multiples method -
Answer-In banking, you almost always use the multiples method as it is
much easier to get data on exit multiples since they are based on
comparable companies.Picking a long term growth rate is always a shot
in the dark. You might use the GGM if you have no good comparables.
What is an appropriate growth rate to use for terminal value - Answer-
Typically the nation's long term GDP growth rate, rate of inflation or
something similar that is conservative. Anything over 5% would be seen
as very aggressive.
How do you select appropriate exit multiples when calculating Terminal
Value? - Answer-Normally you look at comparable companies and pick
the median of the set. You would want to select a range of exit multiples
and show what the TV looks like over that range. For example if the
median EBITDA multiple is 8x you would want to show all TV from 6x
to 10x
Which method of calculating terminal value will give you a higher
valuation? - Answer-Both are highly dependent on the assumptions you
make, but typically the multiples method because exit multiples span a
larger range than long-term growth rates
What is the flaw in basing terminal multiples on what public
comparables are trading at? - Answer-The median multiples could
