Discounted Cash Flow (DCF) Modeling
Exam | Wall Street Prep 2025 Edition
Complete Exam with Verified Questions, Step-by-Step Calculations, and Rationales
A+ Certified | Updated for 2025 | Core Valuation Modeling Practice
About This Exam
The Discounted Cash Flow (DCF) Modeling Exam is a professional-level assessment modeled
after the structure and rigor of Wall Street Prep’s official valuation certification program. It tests
the candidate’s ability to build, interpret, and analyze a full DCF model — a cornerstone of
corporate finance, investment banking, and equity valuation.
This exam measures both conceptual understanding and practical modeling accuracy,
including the ability to:
Forecast free cash flows (FCF)
Determine weighted average cost of capital (WACC)
Calculate terminal value (TV) using both perpetual growth and exit multiple methods
Discount cash flows to derive enterprise value (EV) and equity value
Interpret valuation sensitivity and output scenarios
By the end, you’ll demonstrate the ability to value a business from first principles — connecting
financial statements, market assumptions, and investor expectations.
Topics Covered
✅ Overview of DCF Valuation Methodology
✅ Free Cash Flow to Firm (FCFF) & Free Cash Flow to Equity (FCFE)
✅ Weighted Average Cost of Capital (WACC) Components
✅ Terminal Value: Gordon Growth & Exit Multiple Methods
✅ Present Value and Discount Factor Calculations
✅ Sensitivity & Scenario Analysis
✅ Equity Bridge (EV → Equity → Share Price)
✅ Case Study: DCF Valuation of NovaTech Industries
,Section 1 — Core DCF Concepts (Q1–25)
Q1. What is the basic idea behind a Discounted Cash Flow (DCF) valuation?
✔️ Answer: A DCF values a business by forecasting its future cash flows and
discounting them to present value using an appropriate discount rate.
Rationale: The present value of expected future cash flows equals the intrinsic
value of the business.
Q2. What cash flow do most DCFs use for valuing the firm (the enterprise)?
✔️ Answer: Free Cash Flow to the Firm (FCFF).
Rationale: FCFF is cash available to all capital providers (debt + equity) and is
discounted at WACC to derive Enterprise Value.
Q3. Write the standard formula for FCFF (simplified).
✔️ Answer: FCFF = EBIT × (1 − Tax Rate) + Depreciation & Amortization −
CapEx − ΔNet Working Capital.
Rationale: EBIT after-tax reflects operating profit; D&A adds back non-cash
charges; CapEx and ΔNWC are cash uses.
Q4. What is WACC and why is it used?
✔️ Answer: Weighted Average Cost of Capital — the blended cost of debt and
equity used to discount FCFF.
Rationale: WACC represents the opportunity cost of capital for both debt and
equity providers for a firm with stable capital structure.
Q5. Formula for WACC (unlevered → levered simplified):
✔️ Answer: WACC = (E/V) × Re + (D/V) × Rd × (1 − Tc) where E = market
equity value, D = market debt, V = E + D, Re = cost of equity, Rd = cost of
debt, Tc = tax rate.
, Rationale: Each capital source is weighted by market value; interest is tax-
deductible.
Q6. How do you estimate the cost of equity (Re) using the CAPM?
✔️ Answer: Re = Rf + Beta × (Rm − Rf).
Rationale: CAPM ties required equity return to risk-free rate, market risk
premium, and the stock’s beta.
Q7. If Rf = 2.0%, Beta = 1.2, Market Risk Premium = 6.0%, compute Re (do step-
by-step).
✔️ Answer: Re = 2.0% + 1.2 × 6.0% = 2.0% + 7.2% = 9.2%.
Calculation (digit-by-digit):
Market risk premium × Beta = 6.0% × 1.2 = 7.2%.
Add Rf: 2.0% + 7.2% = 9.2%.
Rationale: Standard CAPM arithmetic.
Q8. If market equity (E) = $600m, market debt (D) = $400m, Rd = 5.0%, Tax rate
= 25%, and Re = 9.2% (from Q7), compute WACC. Show steps.
✔️ Answer: WACC = 7.15% (rounded).
Step-by-step calculation:
1. V = E + D = 600 + 400 = 1,000.
2. E/V = ,000 = 0.60.
3. D/V = ,000 = 0.40.
4. After-tax cost of debt = Rd × (1 − Tc) = 5.0% × (1 − 0.25) = 5.0% × 0.75 =
3.75%.
5. WACC = (E/V)×Re + (D/V)×Rd×(1−Tc) = 0.60×9.2% + 0.40×3.75%
o 0.60 × 9.2% = 5.52% (since 9.2% × 0.6 = 5.52%).
o 0.40 × 3.75% = 1.50% (since 3.75% × 0.4 = 1.5%).
o Sum = 5.52% + 1.50% = 7.02%.
(Note: slight rounding differences — if Re precise 9.2% → WACC =
7.02%)
Exam | Wall Street Prep 2025 Edition
Complete Exam with Verified Questions, Step-by-Step Calculations, and Rationales
A+ Certified | Updated for 2025 | Core Valuation Modeling Practice
About This Exam
The Discounted Cash Flow (DCF) Modeling Exam is a professional-level assessment modeled
after the structure and rigor of Wall Street Prep’s official valuation certification program. It tests
the candidate’s ability to build, interpret, and analyze a full DCF model — a cornerstone of
corporate finance, investment banking, and equity valuation.
This exam measures both conceptual understanding and practical modeling accuracy,
including the ability to:
Forecast free cash flows (FCF)
Determine weighted average cost of capital (WACC)
Calculate terminal value (TV) using both perpetual growth and exit multiple methods
Discount cash flows to derive enterprise value (EV) and equity value
Interpret valuation sensitivity and output scenarios
By the end, you’ll demonstrate the ability to value a business from first principles — connecting
financial statements, market assumptions, and investor expectations.
Topics Covered
✅ Overview of DCF Valuation Methodology
✅ Free Cash Flow to Firm (FCFF) & Free Cash Flow to Equity (FCFE)
✅ Weighted Average Cost of Capital (WACC) Components
✅ Terminal Value: Gordon Growth & Exit Multiple Methods
✅ Present Value and Discount Factor Calculations
✅ Sensitivity & Scenario Analysis
✅ Equity Bridge (EV → Equity → Share Price)
✅ Case Study: DCF Valuation of NovaTech Industries
,Section 1 — Core DCF Concepts (Q1–25)
Q1. What is the basic idea behind a Discounted Cash Flow (DCF) valuation?
✔️ Answer: A DCF values a business by forecasting its future cash flows and
discounting them to present value using an appropriate discount rate.
Rationale: The present value of expected future cash flows equals the intrinsic
value of the business.
Q2. What cash flow do most DCFs use for valuing the firm (the enterprise)?
✔️ Answer: Free Cash Flow to the Firm (FCFF).
Rationale: FCFF is cash available to all capital providers (debt + equity) and is
discounted at WACC to derive Enterprise Value.
Q3. Write the standard formula for FCFF (simplified).
✔️ Answer: FCFF = EBIT × (1 − Tax Rate) + Depreciation & Amortization −
CapEx − ΔNet Working Capital.
Rationale: EBIT after-tax reflects operating profit; D&A adds back non-cash
charges; CapEx and ΔNWC are cash uses.
Q4. What is WACC and why is it used?
✔️ Answer: Weighted Average Cost of Capital — the blended cost of debt and
equity used to discount FCFF.
Rationale: WACC represents the opportunity cost of capital for both debt and
equity providers for a firm with stable capital structure.
Q5. Formula for WACC (unlevered → levered simplified):
✔️ Answer: WACC = (E/V) × Re + (D/V) × Rd × (1 − Tc) where E = market
equity value, D = market debt, V = E + D, Re = cost of equity, Rd = cost of
debt, Tc = tax rate.
, Rationale: Each capital source is weighted by market value; interest is tax-
deductible.
Q6. How do you estimate the cost of equity (Re) using the CAPM?
✔️ Answer: Re = Rf + Beta × (Rm − Rf).
Rationale: CAPM ties required equity return to risk-free rate, market risk
premium, and the stock’s beta.
Q7. If Rf = 2.0%, Beta = 1.2, Market Risk Premium = 6.0%, compute Re (do step-
by-step).
✔️ Answer: Re = 2.0% + 1.2 × 6.0% = 2.0% + 7.2% = 9.2%.
Calculation (digit-by-digit):
Market risk premium × Beta = 6.0% × 1.2 = 7.2%.
Add Rf: 2.0% + 7.2% = 9.2%.
Rationale: Standard CAPM arithmetic.
Q8. If market equity (E) = $600m, market debt (D) = $400m, Rd = 5.0%, Tax rate
= 25%, and Re = 9.2% (from Q7), compute WACC. Show steps.
✔️ Answer: WACC = 7.15% (rounded).
Step-by-step calculation:
1. V = E + D = 600 + 400 = 1,000.
2. E/V = ,000 = 0.60.
3. D/V = ,000 = 0.40.
4. After-tax cost of debt = Rd × (1 − Tc) = 5.0% × (1 − 0.25) = 5.0% × 0.75 =
3.75%.
5. WACC = (E/V)×Re + (D/V)×Rd×(1−Tc) = 0.60×9.2% + 0.40×3.75%
o 0.60 × 9.2% = 5.52% (since 9.2% × 0.6 = 5.52%).
o 0.40 × 3.75% = 1.50% (since 3.75% × 0.4 = 1.5%).
o Sum = 5.52% + 1.50% = 7.02%.
(Note: slight rounding differences — if Re precise 9.2% → WACC =
7.02%)
