Discounted Cash Flow Modeling Questions with Verified Answers
What is the definition of Enterprise Value? - Answers The value of the operating business (operating
assets minus operating liabilities)
1. Operating Assets (Usually all assets except for cash and other investment assets)
2. Operating Liabilities (usually all liabilities except for debt and debt-like liabilities)
3. Enterprise Value doesn't equal the value of the entire business.
What is the definition of Net Debt? - Answers Net Debt represents the Net Current Obligations from
Non-Operating Line Items. (All current debt obligations minus cash)
What is the definition of Equity Value? - Answers This is the value of the portion of the company that
goes back to all equity owners in the company. This is the Net Enterprise Value after all debt obligations
are theoretically paid off.
What are the two main frameworks for valuation? - Answers Intrinsic Valuation (DCF) and Relative
Valuation (Comps)
What is the definition of Intrinsic Valuation (DCF)? - Answers This is derived from the fundemental
analysis of the company's cash flow generation potential
What is the definition of Relative Valuation (Comps)? - Answers This is derived by comparing a company
to its comparable peers.
What is the definition of cash flows? - Answers This is one of the annoying sticking points in finance.
There are a million definitions for cash flows. The one WSP uses is:
Cash Flows = Operating Cash Flows - Required Cash Reinvestment
1. Operating Cash Flows: Cash flows that come from the core operations of a business
2. Required Reinvestments: Cash Reinvestments required to sustain the business's expected rate of
growth
Which is better to use, DCF modeling or Comps modeling? - Answers The answer is both. In theory, they
should get to the same answer. This would be the case if every company was valued at their intrinsic
value on the market. However, companies are sometimes overvalued and undervalued on the market. It
helps to have DCF as a way to calculate the value without relying on the market. On the other hand, if
you use incorrect growth drivers (such as an incorrect growth rate) then your DCF model will be skewed.
It is important to use both options together to build a more complete picture of the real value of the
company.
What are the big DCF implementation Challenges? - Answers 1. There is no real consensus on how to
implement DCF
, 2. Cost of Equity calculations are hotly contested
3. It requires detailed company financials that you might now always have available
4. A DCF is very sensitive to changes in operating, terminal value, and cost of capital assumptions
What is the difference between Unlevered and Levered DCF modeling? - Answers 1. Unlevered DCF
modeling is for valuing the Enterprise Value. This is because Enterprise Value is valuing the firm's value
for all providers of capital.
2. Levered DCF modeling is for valuing the Equity Value of the firm directly. You factor in the debt
payout so you can isolate the value of the firm that is going back to equity holders only.
3. The other distinction to make is an unlevered DCF approach is only valuing assets and liabilities
related to the firm's core business operations. A levered DCF approach also factors in non-operating
income and expenses.
What is the difference between a levered and an unlevered FCF? - Answers An unlevered FCF is the
remaining free money (normally EBIT) after adding back non-cash expenses and subtracting required
reinvestments. A levered FCF takes the unlevered FCF and subtracts the current debt obligations and
interest payments.
How do you convert the Enterprise Value to the Equity Value? - Answers You subtract Net Debt from the
Enterprise Value to arrive at the Equity Value
What is the formula for calculating an unlevered FCF for a given period? - Answers 1. Start: With EBIT
(also called operating income)
2. Subtract: Taxes (don't use normal taxes. multiply EBIT*(1-taxrate) to get to taxes for this calculation)
3. Equals: EBIAT (also called unlevered net income, NOPAT)
4. Add: Depreciation and Amortization
5. Subtract: Increases in Working Capital Assets
6. Add: Increases in Working Capital Liabilities
7. Subtract: Capital Expenditures
8. Subtract: Other Required Investments
9. Equals: Unlevered FCF
Explain what an Unlevered FCF is to the company conceptually. - Answers UFCFs are cash flows from the
operating performance of the business, before any effects of leverage or non-operating assets are
factored in.
What is the definition of Enterprise Value? - Answers The value of the operating business (operating
assets minus operating liabilities)
1. Operating Assets (Usually all assets except for cash and other investment assets)
2. Operating Liabilities (usually all liabilities except for debt and debt-like liabilities)
3. Enterprise Value doesn't equal the value of the entire business.
What is the definition of Net Debt? - Answers Net Debt represents the Net Current Obligations from
Non-Operating Line Items. (All current debt obligations minus cash)
What is the definition of Equity Value? - Answers This is the value of the portion of the company that
goes back to all equity owners in the company. This is the Net Enterprise Value after all debt obligations
are theoretically paid off.
What are the two main frameworks for valuation? - Answers Intrinsic Valuation (DCF) and Relative
Valuation (Comps)
What is the definition of Intrinsic Valuation (DCF)? - Answers This is derived from the fundemental
analysis of the company's cash flow generation potential
What is the definition of Relative Valuation (Comps)? - Answers This is derived by comparing a company
to its comparable peers.
What is the definition of cash flows? - Answers This is one of the annoying sticking points in finance.
There are a million definitions for cash flows. The one WSP uses is:
Cash Flows = Operating Cash Flows - Required Cash Reinvestment
1. Operating Cash Flows: Cash flows that come from the core operations of a business
2. Required Reinvestments: Cash Reinvestments required to sustain the business's expected rate of
growth
Which is better to use, DCF modeling or Comps modeling? - Answers The answer is both. In theory, they
should get to the same answer. This would be the case if every company was valued at their intrinsic
value on the market. However, companies are sometimes overvalued and undervalued on the market. It
helps to have DCF as a way to calculate the value without relying on the market. On the other hand, if
you use incorrect growth drivers (such as an incorrect growth rate) then your DCF model will be skewed.
It is important to use both options together to build a more complete picture of the real value of the
company.
What are the big DCF implementation Challenges? - Answers 1. There is no real consensus on how to
implement DCF
, 2. Cost of Equity calculations are hotly contested
3. It requires detailed company financials that you might now always have available
4. A DCF is very sensitive to changes in operating, terminal value, and cost of capital assumptions
What is the difference between Unlevered and Levered DCF modeling? - Answers 1. Unlevered DCF
modeling is for valuing the Enterprise Value. This is because Enterprise Value is valuing the firm's value
for all providers of capital.
2. Levered DCF modeling is for valuing the Equity Value of the firm directly. You factor in the debt
payout so you can isolate the value of the firm that is going back to equity holders only.
3. The other distinction to make is an unlevered DCF approach is only valuing assets and liabilities
related to the firm's core business operations. A levered DCF approach also factors in non-operating
income and expenses.
What is the difference between a levered and an unlevered FCF? - Answers An unlevered FCF is the
remaining free money (normally EBIT) after adding back non-cash expenses and subtracting required
reinvestments. A levered FCF takes the unlevered FCF and subtracts the current debt obligations and
interest payments.
How do you convert the Enterprise Value to the Equity Value? - Answers You subtract Net Debt from the
Enterprise Value to arrive at the Equity Value
What is the formula for calculating an unlevered FCF for a given period? - Answers 1. Start: With EBIT
(also called operating income)
2. Subtract: Taxes (don't use normal taxes. multiply EBIT*(1-taxrate) to get to taxes for this calculation)
3. Equals: EBIAT (also called unlevered net income, NOPAT)
4. Add: Depreciation and Amortization
5. Subtract: Increases in Working Capital Assets
6. Add: Increases in Working Capital Liabilities
7. Subtract: Capital Expenditures
8. Subtract: Other Required Investments
9. Equals: Unlevered FCF
Explain what an Unlevered FCF is to the company conceptually. - Answers UFCFs are cash flows from the
operating performance of the business, before any effects of leverage or non-operating assets are
factored in.
