DCF Questions with Detailed Verified Answers

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DCF Questions with Detailed Verified
Answers
Question: A DCF values a company based on:
Answer:


✓ The present value of its cash flows and the present value of its terminal
value.


Question: Walk me through a DCF
Answer:


✓ First, you project out the company's financials using assumptions for
revenue growth, expenses and working capital. Then you get FCF for
each year which you sum up and discount to a NPV based on your
discount rate, usually the WACC. Then you determine the company's
terminal value using either the multiples method or the Gordon Growth
Method and dicount that back to NPV using WACC. Add the two
together to get the estimated EV.


Question: How do you get from revenue to FCF?
Answer:


✓ Revenue-COGS-Operating Expenses to get to EBIT. Then multiply by
(1-Tax Rate), add back Depreciation and other non-cash charges and
subtract CAPEX and the change in Working Capital. (This is unlevered
FCF since we went off of EBIT rather than EBT).

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Question: What is an alternate way to calculate FCF aside from taking NI,
adding DEP and subtracting CAPEX?
Answer:


✓ Take CF from operations and subtract CAPEX to get levered CF. To get
unlevered you need to add back the tax adjusted interest expense and
subtract tax adjusted interest income.


Question: Why do you use 5 or 10 years for a DCF?
Answer:


✓ Anything beyond 10 years is too difficult to predict for most
companies.


Question: What do you usually use for the discount rate?
Answer:


✓ WACC, although you could use Cost of Equity.


Question: How do you calculate WACC?
Answer:


✓ Cost of Equity *% of capital structure composed of equity+ cost of
debt* % of capital structure composed of debt*(1-tax rate) + cost of
preferred*% of capital structure composed of preferred


Question: How do you calculate cost of equity
Answer: