DCF BIWS practice exam| 80 questions| with
complete solution
Difference between levered and unlevered DCF? Correct Answer: A levered DCF projects FCF
after interest expense and interest income, where an unlevered DCF projects FCF before the
impact of interest. Therefore, a levered DCF attempts to value the equity portion of a company
and an unlevered DCF values the company as a whole
Steps to calculating the WACC? Correct Answer: 1. Determine the target capital structure
consistent with the firm's long term strategy. You can look at historical company debt to total
capitalization ratios and peer companies capital structure.
2. Estimate the cost of debt/equity
3. Calculate the WACC
Why would you want to use UFCF over Levered FCF? Correct Answer: UFCF allows for
apples-to-apples comparison of a company's cash flows and allows you to test out different
capital structures to see the effect on the company's value.
Using UFCF you can see how much cash a company generates independent of the effects of its
capital structure.
Walk me through a DCF Correct Answer: A DCF intrinsically values a company by discounting
its projected free cash flows back to the present value using the WACC, and adding the present
value of the terminal value of the company, calculated using either the exit multiple or perpetuity
growth rate.
First, you project out the company's financials using assumptions for revenue growth, expenses,
and operating working capital.
You then calculate Free Cash Flow for each year, discount it back to its present value usually
using the WACC or Cost of Equity, and sum up to get the net present value of FCF's for the
whole projection period .
Next, you calculate the company's terminal value using the Exit Multiple method or the
Perpetuity Growth Rate method and discount that back to its present value using the WACC or
Cost of Equity as well.
You add the NPV of the FCF and the PV of the terminal value of the company to get Enterprise
Value for UFCF and Equity Value for Levered DCF.
Walk me through how you get from Revenue to Free Cash Flow in the projections Correct
Answer: For UFCF: subtract the COGS and SG&A expenses to get EBIT.
, Multiply EBIT by (1-Tax rate), add back D&A, subtract CapEx, and adjust for changes in
operating assets and liabilities.
Levered: Use Net Income instead of EBIT, also subtract mandatory debt repayments
Why is a DCF with a private company hard? Correct Answer: Hard to calculate the discount rate
because the private company doesn't have a market cap or beta. You'd probably just estimate the
WACC based on a comparable company
Why do you add back non cash expenses? Correct Answer: To show that they saved the
company on taxes, but that they didn't pay for the expense in cash
What are the advantages of using a DCF? Correct Answer: Theoritecally the most accurate bc its
based on the value of the businesses future cash flows.
1) Don't care about peers because of the intrinsic nature of a dcf
2) Not influenced by temporary market conditions
3) Flexible
Disadvantages of using a DCF Correct Answer: Based on many assumptions and forecasts like
revenue growth, expenses, and EBITDA margins that are highly sensitive to slight changes and
can make the valuation vary widely.
A basic DCF also assumes a constant capital structure over the projection period
Drivers of a DCF Correct Answer: 1) FCF
2)Discount rate
3) Terminal value
What's more sensitive part of a DCF, FCF or discount rate Correct Answer: FCF
What's an alternate way to calculate Free Cash Flow aside from taking Net Income, adding back
Depreciation, and subtracting Changes in Operating Assets / Liabilities and CapEx? Correct
Answer: To get levered FCF, You take Cash Flow from Operations and subtract CapEx.
To get to UFCF, you then need to add back adjusted interest expense and subtract tax-adjusted
interest income.
What is free cash flow? Correct Answer: How much after-tax cash flow the company generates
after accounting for non-cash expenses like D&A, and real cash expenses like CapEx and
increases in net operating working capital
complete solution
Difference between levered and unlevered DCF? Correct Answer: A levered DCF projects FCF
after interest expense and interest income, where an unlevered DCF projects FCF before the
impact of interest. Therefore, a levered DCF attempts to value the equity portion of a company
and an unlevered DCF values the company as a whole
Steps to calculating the WACC? Correct Answer: 1. Determine the target capital structure
consistent with the firm's long term strategy. You can look at historical company debt to total
capitalization ratios and peer companies capital structure.
2. Estimate the cost of debt/equity
3. Calculate the WACC
Why would you want to use UFCF over Levered FCF? Correct Answer: UFCF allows for
apples-to-apples comparison of a company's cash flows and allows you to test out different
capital structures to see the effect on the company's value.
Using UFCF you can see how much cash a company generates independent of the effects of its
capital structure.
Walk me through a DCF Correct Answer: A DCF intrinsically values a company by discounting
its projected free cash flows back to the present value using the WACC, and adding the present
value of the terminal value of the company, calculated using either the exit multiple or perpetuity
growth rate.
First, you project out the company's financials using assumptions for revenue growth, expenses,
and operating working capital.
You then calculate Free Cash Flow for each year, discount it back to its present value usually
using the WACC or Cost of Equity, and sum up to get the net present value of FCF's for the
whole projection period .
Next, you calculate the company's terminal value using the Exit Multiple method or the
Perpetuity Growth Rate method and discount that back to its present value using the WACC or
Cost of Equity as well.
You add the NPV of the FCF and the PV of the terminal value of the company to get Enterprise
Value for UFCF and Equity Value for Levered DCF.
Walk me through how you get from Revenue to Free Cash Flow in the projections Correct
Answer: For UFCF: subtract the COGS and SG&A expenses to get EBIT.
, Multiply EBIT by (1-Tax rate), add back D&A, subtract CapEx, and adjust for changes in
operating assets and liabilities.
Levered: Use Net Income instead of EBIT, also subtract mandatory debt repayments
Why is a DCF with a private company hard? Correct Answer: Hard to calculate the discount rate
because the private company doesn't have a market cap or beta. You'd probably just estimate the
WACC based on a comparable company
Why do you add back non cash expenses? Correct Answer: To show that they saved the
company on taxes, but that they didn't pay for the expense in cash
What are the advantages of using a DCF? Correct Answer: Theoritecally the most accurate bc its
based on the value of the businesses future cash flows.
1) Don't care about peers because of the intrinsic nature of a dcf
2) Not influenced by temporary market conditions
3) Flexible
Disadvantages of using a DCF Correct Answer: Based on many assumptions and forecasts like
revenue growth, expenses, and EBITDA margins that are highly sensitive to slight changes and
can make the valuation vary widely.
A basic DCF also assumes a constant capital structure over the projection period
Drivers of a DCF Correct Answer: 1) FCF
2)Discount rate
3) Terminal value
What's more sensitive part of a DCF, FCF or discount rate Correct Answer: FCF
What's an alternate way to calculate Free Cash Flow aside from taking Net Income, adding back
Depreciation, and subtracting Changes in Operating Assets / Liabilities and CapEx? Correct
Answer: To get levered FCF, You take Cash Flow from Operations and subtract CapEx.
To get to UFCF, you then need to add back adjusted interest expense and subtract tax-adjusted
interest income.
What is free cash flow? Correct Answer: How much after-tax cash flow the company generates
after accounting for non-cash expenses like D&A, and real cash expenses like CapEx and
increases in net operating working capital
