FIN 4330 INVESTMENT BANKING
UIOWA QUIZ 3 EXAM QUESTIONS AND
ANSWERS | 2026 UPDATE | 100%
CORRECT.
Discounted cash flow (DCF): - ANS A method of investment appraisal that takes interest rates
into account by calculating the present value of it's projected Free Cash Flow.
Free Cash Flow (FCF) - ANS the amount of cash that could be withdrawn without harming a
firm's ability to operate and to produce future cash flows. Typicallty calculated for a 5 year
period
Intrinsic Value: - ANS The valuation implied for a target by a DCF
terminal value: - ANS used to capture the remaining value of the target beyond projection
period
Discounted Cash flow (DCF) Analysis Steps: - ANS I. Study the target and determine key
performance drivers
II. Project Free Cash Flow (FCF)
III. Calculate the Weighted Average Cost of Capital (WACC)
IV. Determine Terminal Value
V. Calculate Present Value and Determine Valuation
@COPYRIGHT ALL RIGHTS RESERVED PAGE 1 OF 12
, Studying the target and determine key performance drivers: - ANS - Public companies: Look
at available filings (10k, 10q, and 8ks), equity research reports, earning call transcripts, and
investor presentations.
- Private Companies: Reliant on companies management to provide documents containing basic
financial and business info (usually provided in a CIM)
Discounted Cash Flow (DCF) Drawbacks: - ANS - Discount Rate (WACC or Cost of Equity) and
Terminal Value assumptions typically have a substantial impact on the output
- DCF output is viewed in terms of a valuation range based on a range of key input assumptions,
rather than as a single value.
- The impact of these assumptions on valuation is tested using sensitivity analysis on key inputs
(Discount Rate, Sales Growth, EBIT margin assumptions, Exit Multiples, etc.) DCF overlooks what
happens to cash flow.
- FCF doesn't get mailed to you in a check - rather, stays with company and management does
something with it, which can include M&A, stock buybacks, capex, increase salaries, all of which
may provide limited value to owners. Just because an analyst can't predict when the next
downturn comes doesn't mean there won't be one.
- Since not technically cash, stock-based compensation gets added back to operating cash flow
and is therefore excluded from uses of cash, which therefore overstates the true earnings
potential of firm. Most DCF analyses assume a terminal growth rate in line with long term
nominal growth rate of the economy of 2-4% which is usually too high
Calculating FCFF from EBIT: - ANS Step 1: EBIAT = EBIT - Taxes (at target marginal tax rate)
Step 2: FCFF = EBIAT + D&A - Capex - Increase/ (Decrease) in Net Working Capital
AKA.
Earnings before interest and taxes
Less: Taxes (at a marginal tax rate) =
@COPYRIGHT ALL RIGHTS RESERVED PAGE 2 OF 12
UIOWA QUIZ 3 EXAM QUESTIONS AND
ANSWERS | 2026 UPDATE | 100%
CORRECT.
Discounted cash flow (DCF): - ANS A method of investment appraisal that takes interest rates
into account by calculating the present value of it's projected Free Cash Flow.
Free Cash Flow (FCF) - ANS the amount of cash that could be withdrawn without harming a
firm's ability to operate and to produce future cash flows. Typicallty calculated for a 5 year
period
Intrinsic Value: - ANS The valuation implied for a target by a DCF
terminal value: - ANS used to capture the remaining value of the target beyond projection
period
Discounted Cash flow (DCF) Analysis Steps: - ANS I. Study the target and determine key
performance drivers
II. Project Free Cash Flow (FCF)
III. Calculate the Weighted Average Cost of Capital (WACC)
IV. Determine Terminal Value
V. Calculate Present Value and Determine Valuation
@COPYRIGHT ALL RIGHTS RESERVED PAGE 1 OF 12
, Studying the target and determine key performance drivers: - ANS - Public companies: Look
at available filings (10k, 10q, and 8ks), equity research reports, earning call transcripts, and
investor presentations.
- Private Companies: Reliant on companies management to provide documents containing basic
financial and business info (usually provided in a CIM)
Discounted Cash Flow (DCF) Drawbacks: - ANS - Discount Rate (WACC or Cost of Equity) and
Terminal Value assumptions typically have a substantial impact on the output
- DCF output is viewed in terms of a valuation range based on a range of key input assumptions,
rather than as a single value.
- The impact of these assumptions on valuation is tested using sensitivity analysis on key inputs
(Discount Rate, Sales Growth, EBIT margin assumptions, Exit Multiples, etc.) DCF overlooks what
happens to cash flow.
- FCF doesn't get mailed to you in a check - rather, stays with company and management does
something with it, which can include M&A, stock buybacks, capex, increase salaries, all of which
may provide limited value to owners. Just because an analyst can't predict when the next
downturn comes doesn't mean there won't be one.
- Since not technically cash, stock-based compensation gets added back to operating cash flow
and is therefore excluded from uses of cash, which therefore overstates the true earnings
potential of firm. Most DCF analyses assume a terminal growth rate in line with long term
nominal growth rate of the economy of 2-4% which is usually too high
Calculating FCFF from EBIT: - ANS Step 1: EBIAT = EBIT - Taxes (at target marginal tax rate)
Step 2: FCFF = EBIAT + D&A - Capex - Increase/ (Decrease) in Net Working Capital
AKA.
Earnings before interest and taxes
Less: Taxes (at a marginal tax rate) =
@COPYRIGHT ALL RIGHTS RESERVED PAGE 2 OF 12
