DCF M&I 400 EXAM QUESTIONS AND
ANSWERS GRADED A+ 2026
Walk me through a DCF - ANS Values a company based on Present value of its cash flows and
present value of its terminal value
1) Project out free cash flow for each year
2) Sum up and discount to NPV using a discount rate
3) Determine terminal value and discount to NPV
4) Add FCF and terminal value for company's enterprise value
Revenue to Free cash flow - ANS 1) Subtract COGS and operating expenses to get operating
income (EBIT)
2) Multiply by (1 - Tax Rate)
3) Add back depreciation and other non-cash charges
4) Subtract capital expenditures and change in working capital
(Use EBT to get levered cash flow)
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
1
, Calculate FCF another way - ANS 1) Subtract CapEx from CFO -- levered cash flow
2) Add back tax-adjusted interest expense and subtract tax-adjusted interest income --
unlevered cash flow
Why 5-10 year DCF projections? - ANS Less than 5 is not useful, more than 10 is hard to
predict
What is the discount rate? - ANS WACC or COE (depending on how you set up DCF)
WACC formula - ANS Cost of equity * %equity + cost of debt * %debt * (1-Tax Rate) + cost of
preferred * %preferred
Cost of equity -- CAPM
Other costs -- look at comparable companies or debt issuances and interest rates/yields issued
by similar companies
COE formula - ANS COE = Risk-free rate + Beta * Equity Risk Premium
Risk-free rate -- how much a 10-year or 20-year treasury should yield
Beta -- "riskiness" of Comparable Companies
Equity Risk Premium -- % by which stocks are expected to outperform "riskless" assets
Beta Calculation - ANS 1) Look up Beta for each comparable company on Bloomberg
2) Un-lever and take median of set
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
2
ANSWERS GRADED A+ 2026
Walk me through a DCF - ANS Values a company based on Present value of its cash flows and
present value of its terminal value
1) Project out free cash flow for each year
2) Sum up and discount to NPV using a discount rate
3) Determine terminal value and discount to NPV
4) Add FCF and terminal value for company's enterprise value
Revenue to Free cash flow - ANS 1) Subtract COGS and operating expenses to get operating
income (EBIT)
2) Multiply by (1 - Tax Rate)
3) Add back depreciation and other non-cash charges
4) Subtract capital expenditures and change in working capital
(Use EBT to get levered cash flow)
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
1
, Calculate FCF another way - ANS 1) Subtract CapEx from CFO -- levered cash flow
2) Add back tax-adjusted interest expense and subtract tax-adjusted interest income --
unlevered cash flow
Why 5-10 year DCF projections? - ANS Less than 5 is not useful, more than 10 is hard to
predict
What is the discount rate? - ANS WACC or COE (depending on how you set up DCF)
WACC formula - ANS Cost of equity * %equity + cost of debt * %debt * (1-Tax Rate) + cost of
preferred * %preferred
Cost of equity -- CAPM
Other costs -- look at comparable companies or debt issuances and interest rates/yields issued
by similar companies
COE formula - ANS COE = Risk-free rate + Beta * Equity Risk Premium
Risk-free rate -- how much a 10-year or 20-year treasury should yield
Beta -- "riskiness" of Comparable Companies
Equity Risk Premium -- % by which stocks are expected to outperform "riskless" assets
Beta Calculation - ANS 1) Look up Beta for each comparable company on Bloomberg
2) Un-lever and take median of set
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
2
