Discounted Cash Flow Model Exam Wall Street Prep EXAM Which is better to use, DCF modeling or Comps modeling? - CORRECT
2025 UPDATE/PRACTICE QUESTIONS AND CORRECT VERIFIED ANSWERThe answer is both. In theory, they should get to the same answer. This
ANSWERS (complete solutions) ASSURED SUCCESS/GRADED would be the case if every company was valued at their intrinsic value on the
market.
A+!!! 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 is the definition of Intrinsic Valuation (DCF)? - CORRECT ANSWER-This is
derived from the fundemental analysis of the company's cash flow generation
potential
What are the big DCF implementation Challenges? - CORRECT ANSWER-1.
There is no real consensus on how to implement DCF
2. Cost of Equity calculations are hotly contested
What is the definition of Relative Valuation (Comps)? - CORRECT ANSWER-This
is derived by comparing a company to its comparable peers. 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
What is the definition of cash flows? - CORRECT ANSWER-This is one of the capital assumptions
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 What is the difference between Unlevered and Levered DCF modeling? -
1. Operating Cash Flows: Cash flows that come from the core operations of a CORRECT ANSWER-1. Unlevered DCF modeling is for valuing the Enterprise
business Value. This is because Enterprise Value is valuing the firm's value for all providers
of capital.
2. Required Reinvestments: Cash Reinvestments required to sustain the
business's expected rate of growth 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 FCF takes the unlevered FCF and subtracts the current debt obligations and
assets and liabilities related to the firm's core business operations. A levered DCF interest payments.
approach also factors in non-operating income and expenses.
What is the definition of Enterprise Value? - CORRECT ANSWER-The value of How do you convert the Enterprise Value to the Equity Value? - CORRECT
the operating business (operating assets minus operating liabilities) ANSWER-You subtract Net Debt from the Enterprise Value to arrive at the Equity
Value
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
What is the formula for calculating an unlevered FCF for a given period? -
liabilities)
CORRECT ANSWER-1. Start: With EBIT (also called operating income)
3. Enterprise Value doesn't equal the value of the entire business.
2. Subtract: Taxes (don't use normal taxes. multiply EBIT*(1-taxrate) to get to
taxes for this calculation)
What is the definition of Net Debt? - CORRECT ANSWER-Net Debt represents 3. Equals: EBIAT (also called unlevered net income, NOPAT)
the Net Current Obligations from Non-Operating Line Items. (All current debt 4. Add: Depreciation and Amortization
obligations minus cash)
5. Subtract: Increases in Working Capital Assets
6. Add: Increases in Working Capital Liabilities
What is the definition of Equity Value? - CORRECT ANSWER-This is the value of
7. Subtract: Capital Expenditures
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. 8. Subtract: Other Required Investments
9. Equals: Unlevered FCF
What are the two main frameworks for valuation? - CORRECT ANSWER-
Intrinsic
Explain what an Unlevered FCF is to the company conceptually. - CORRECT
Valuation (DCF) and Relative Valuation (Comps)
ANSWER-UFCFs are cash flows from the operating performance of the business,
What is the difference between a levered and an unlevered FCF? - CORRECT before any effects of leverage or non-operating assets are factored in.
ANSWER-An unlevered FCF is the remaining free money (normally EBIT) after UFCFs are a company's cash flow AS IF it was an all-equity financed company with
adding back non-cash expenses and subtracting required reinvestments. A levered no non-operating assets.
2025 UPDATE/PRACTICE QUESTIONS AND CORRECT VERIFIED ANSWERThe answer is both. In theory, they should get to the same answer. This
ANSWERS (complete solutions) ASSURED SUCCESS/GRADED would be the case if every company was valued at their intrinsic value on the
market.
A+!!! 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 is the definition of Intrinsic Valuation (DCF)? - CORRECT ANSWER-This is
derived from the fundemental analysis of the company's cash flow generation
potential
What are the big DCF implementation Challenges? - CORRECT ANSWER-1.
There is no real consensus on how to implement DCF
2. Cost of Equity calculations are hotly contested
What is the definition of Relative Valuation (Comps)? - CORRECT ANSWER-This
is derived by comparing a company to its comparable peers. 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
What is the definition of cash flows? - CORRECT ANSWER-This is one of the capital assumptions
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 What is the difference between Unlevered and Levered DCF modeling? -
1. Operating Cash Flows: Cash flows that come from the core operations of a CORRECT ANSWER-1. Unlevered DCF modeling is for valuing the Enterprise
business Value. This is because Enterprise Value is valuing the firm's value for all providers
of capital.
2. Required Reinvestments: Cash Reinvestments required to sustain the
business's expected rate of growth 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 FCF takes the unlevered FCF and subtracts the current debt obligations and
assets and liabilities related to the firm's core business operations. A levered DCF interest payments.
approach also factors in non-operating income and expenses.
What is the definition of Enterprise Value? - CORRECT ANSWER-The value of How do you convert the Enterprise Value to the Equity Value? - CORRECT
the operating business (operating assets minus operating liabilities) ANSWER-You subtract Net Debt from the Enterprise Value to arrive at the Equity
Value
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
What is the formula for calculating an unlevered FCF for a given period? -
liabilities)
CORRECT ANSWER-1. Start: With EBIT (also called operating income)
3. Enterprise Value doesn't equal the value of the entire business.
2. Subtract: Taxes (don't use normal taxes. multiply EBIT*(1-taxrate) to get to
taxes for this calculation)
What is the definition of Net Debt? - CORRECT ANSWER-Net Debt represents 3. Equals: EBIAT (also called unlevered net income, NOPAT)
the Net Current Obligations from Non-Operating Line Items. (All current debt 4. Add: Depreciation and Amortization
obligations minus cash)
5. Subtract: Increases in Working Capital Assets
6. Add: Increases in Working Capital Liabilities
What is the definition of Equity Value? - CORRECT ANSWER-This is the value of
7. Subtract: Capital Expenditures
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. 8. Subtract: Other Required Investments
9. Equals: Unlevered FCF
What are the two main frameworks for valuation? - CORRECT ANSWER-
Intrinsic
Explain what an Unlevered FCF is to the company conceptually. - CORRECT
Valuation (DCF) and Relative Valuation (Comps)
ANSWER-UFCFs are cash flows from the operating performance of the business,
What is the difference between a levered and an unlevered FCF? - CORRECT before any effects of leverage or non-operating assets are factored in.
ANSWER-An unlevered FCF is the remaining free money (normally EBIT) after UFCFs are a company's cash flow AS IF it was an all-equity financed company with
adding back non-cash expenses and subtracting required reinvestments. A levered no non-operating assets.
