1
Discounted Cash Flow
Model Exam Wall Street
Prep QUESTIONS AND
ANSWERS GRADED
A+ GUARANTEED
PASS
Mergers and acquisitions (Erasmus Universiteit Rotterdam)
Income statement 0 1 2 3 Assumptions
Sales 300.0 306.0 312.1 318.4 Sales growth
Costs (200.0) (204.0) (208.1) (212.2) Perpetual growth
EBIT 100.0 102.0 104.0 106.1 Costs / Sales
Operating taxes (30.0) (30.6) (31.2) (31.8) Invested capital / Sales
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NOPLAT 70.0 71.4 72.8 74.3 Debt / Sales
Interest (9.8) (10.0) (10.2) (10.4) Tax rate
Tax shield 2.9 3.0 3.1 3.1 Interest rate
Net income 63.1 64.4 65.7 67.0
Balance sheet 0 1 2 3 WACC
Invested capital 300.0 306.0 312.1 318.4 Risk free rate
Spread on debt
Debt 200.0 204.0 208.1 212.2 k(D)
Equity 100.0 102.0 104.0 106.1
Sources 300.0 306.0 312.1 318.4 Risk free rate
Market risk premium
Cash flows 0 1 2 3 Industry beta unlevered
NOPLAT 71.4 72.8 74.3
Net investments (Delta (6.0) (6.1) (6.2) Enterprise value (market value)
IC)
FCFO 65.4 66.7 68.0 Debt (market value)
Interests (10.0) (10.2) (10.4) Equity (market value)
Tax shield 3.0 3.1 3.1 ND / E
Debt issues 4.0 4.1 4.2 ND / (ND + E)
Total CF to 62.4 63.6 64.9 E / (ND + E)
shareholders
No cash into net debt because cash is distributed to shareholders Beta relevered
k(E)(L)
To achieve APV and DCF equivalence:
- Need to link WACC to market value of equity WACC
- Need to compute tax shields on beginning-of-period debt
- Need to keep a constant growth rate, because otherwise
k(E)(
U) there is a mismatch in growth of the components of APV and DCF
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0 1 2 3 CV DCF 0 1
2.0% 2.0% 2.0% 2.0% FCFO 65.4
2.0% Continuing value @ FCFO perpetuity
66.7% 66.7% 66.7% 66.7% Continuing value @ Key Value
Driver
100.0% 100.0% 100.0% 100.0%
66.7% 66.7% 66.7% 66.7% Discount factor @ WACC 0.92
30.0% 30.0% 30.0% 30.0% Discounted FCFO 59.9
Enterprise value 920.0
5.0% 5.0% 5.0% 5.0%
Economic Profit 0 1
NOPLAT 71.4
3.0% Initial IC 300.0
2.0% ROIC 23.8%
5.0% Economic profit 44.1
Continuing value - First component
3.0% Continuing value - Second component
5.0%
1.200 Discount factor @ WACC 0.92
Discounted EP 40.4
920.0 Invested capital 300.0
200.0 Enterprise value 920.0
720.0
27.8% Adjusted present value 0 1
21.7% FCFO 65.4
78.3% Continuing value of FCFO
Tax shield 3.0
1.533 Continuing value of tax shields
10.7%
Discount factor @ k(E)(U) 0.91
9.1% Discounted FCFO 59.8
Discounted TS 2.7
9.4% Unlevered value 879.6
Value of tax shields 40.4
Enterprise value 920.0
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Discounted Cash Flow
Model Exam Wall Street
Prep QUESTIONS AND
ANSWERS GRADED
A+ GUARANTEED
PASS
Mergers and acquisitions (Erasmus Universiteit Rotterdam)
Income statement 0 1 2 3 Assumptions
Sales 300.0 306.0 312.1 318.4 Sales growth
Costs (200.0) (204.0) (208.1) (212.2) Perpetual growth
EBIT 100.0 102.0 104.0 106.1 Costs / Sales
Operating taxes (30.0) (30.6) (31.2) (31.8) Invested capital / Sales
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NOPLAT 70.0 71.4 72.8 74.3 Debt / Sales
Interest (9.8) (10.0) (10.2) (10.4) Tax rate
Tax shield 2.9 3.0 3.1 3.1 Interest rate
Net income 63.1 64.4 65.7 67.0
Balance sheet 0 1 2 3 WACC
Invested capital 300.0 306.0 312.1 318.4 Risk free rate
Spread on debt
Debt 200.0 204.0 208.1 212.2 k(D)
Equity 100.0 102.0 104.0 106.1
Sources 300.0 306.0 312.1 318.4 Risk free rate
Market risk premium
Cash flows 0 1 2 3 Industry beta unlevered
NOPLAT 71.4 72.8 74.3
Net investments (Delta (6.0) (6.1) (6.2) Enterprise value (market value)
IC)
FCFO 65.4 66.7 68.0 Debt (market value)
Interests (10.0) (10.2) (10.4) Equity (market value)
Tax shield 3.0 3.1 3.1 ND / E
Debt issues 4.0 4.1 4.2 ND / (ND + E)
Total CF to 62.4 63.6 64.9 E / (ND + E)
shareholders
No cash into net debt because cash is distributed to shareholders Beta relevered
k(E)(L)
To achieve APV and DCF equivalence:
- Need to link WACC to market value of equity WACC
- Need to compute tax shields on beginning-of-period debt
- Need to keep a constant growth rate, because otherwise
k(E)(
U) there is a mismatch in growth of the components of APV and DCF
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0 1 2 3 CV DCF 0 1
2.0% 2.0% 2.0% 2.0% FCFO 65.4
2.0% Continuing value @ FCFO perpetuity
66.7% 66.7% 66.7% 66.7% Continuing value @ Key Value
Driver
100.0% 100.0% 100.0% 100.0%
66.7% 66.7% 66.7% 66.7% Discount factor @ WACC 0.92
30.0% 30.0% 30.0% 30.0% Discounted FCFO 59.9
Enterprise value 920.0
5.0% 5.0% 5.0% 5.0%
Economic Profit 0 1
NOPLAT 71.4
3.0% Initial IC 300.0
2.0% ROIC 23.8%
5.0% Economic profit 44.1
Continuing value - First component
3.0% Continuing value - Second component
5.0%
1.200 Discount factor @ WACC 0.92
Discounted EP 40.4
920.0 Invested capital 300.0
200.0 Enterprise value 920.0
720.0
27.8% Adjusted present value 0 1
21.7% FCFO 65.4
78.3% Continuing value of FCFO
Tax shield 3.0
1.533 Continuing value of tax shields
10.7%
Discount factor @ k(E)(U) 0.91
9.1% Discounted FCFO 59.8
Discounted TS 2.7
9.4% Unlevered value 879.6
Value of tax shields 40.4
Enterprise value 920.0
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