Wall Street Prep DCF Modeling Exam
Questions And Correct Answers (Verified
Answers) Plus Rationales 2025/2026 Q&A |
Instant Download Pdf
1. What is the most common free cash flow metric used in an unlevered DCF
model?
Unlevered Free Cash Flow (UFCF)
Unlevered DCF uses UFCF, which excludes interest and reflects cash flow available
to all capital providers.
2. Which of the following is typically the terminal value calculation method?
Gordon Growth Method
The Gordon Growth (Perpetuity) method is a standard way to calculate terminal
value by assuming constant growth beyond the forecast period.
3. Which discount rate is appropriate for an unlevered DCF?
Weighted Average Cost of Capital (WACC)
WACC reflects the cost of both debt and equity and is appropriate for valuing the
entire firm.
4. What is the correct formula for UFCF?
,EBIT × (1 - Tax Rate) + D&A - CapEx - Change in NWC
This formula derives free cash flow from operating earnings without interest.
5. If a company has negative working capital, what impact does that typically
have on UFCF?
Increases UFCF
Negative working capital usually implies cash inflow from operations, boosting
UFCF.
6. Terminal value using the perpetuity growth method is most sensitive to
changes in:
Discount Rate and Growth Rate
Small changes in these assumptions can significantly change terminal value.
7. Why do we add back depreciation in UFCF?
It’s a non-cash expense
Depreciation reduces EBIT but doesn’t consume cash, so it’s added back.
8. In a DCF, how many years of forecast is standard?
5–10 years
Forecasting too far becomes unreliable; 5–10 years balances detail and reliability.
9. What does the DCF model primarily measure?
Intrinsic value
It estimates the present value of future cash flows.
10.What type of growth rate is used in the terminal value formula?
, Long-term perpetual growth rate
This rate reflects stable, mature growth beyond the forecast period.
11.A higher WACC will:
Lower the DCF valuation
Higher discount rates reduce the present value of future cash flows.
12.What is the best proxy for the risk-free rate in a WACC?
10-year Treasury yield
It represents a stable, low-risk return for U.S. investments.
13.Why is beta used in cost of equity calculations?
It measures systematic risk relative to the market
Beta quantifies how a stock moves compared to the market, informing cost of
equity.
14.Cost of equity is calculated using:
CAPM
The Capital Asset Pricing Model (CAPM) estimates cost of equity using beta.
15.What effect does higher leverage (debt) have on WACC, all else equal?
May lower WACC due to tax shield
Debt interest is tax-deductible, potentially lowering WACC, up to a point.
16.Which of the following is not included in WACC?
Dividends paid
WACC includes capital costs, not dividends, which are returns.
17.If cost of debt increases, WACC:
Questions And Correct Answers (Verified
Answers) Plus Rationales 2025/2026 Q&A |
Instant Download Pdf
1. What is the most common free cash flow metric used in an unlevered DCF
model?
Unlevered Free Cash Flow (UFCF)
Unlevered DCF uses UFCF, which excludes interest and reflects cash flow available
to all capital providers.
2. Which of the following is typically the terminal value calculation method?
Gordon Growth Method
The Gordon Growth (Perpetuity) method is a standard way to calculate terminal
value by assuming constant growth beyond the forecast period.
3. Which discount rate is appropriate for an unlevered DCF?
Weighted Average Cost of Capital (WACC)
WACC reflects the cost of both debt and equity and is appropriate for valuing the
entire firm.
4. What is the correct formula for UFCF?
,EBIT × (1 - Tax Rate) + D&A - CapEx - Change in NWC
This formula derives free cash flow from operating earnings without interest.
5. If a company has negative working capital, what impact does that typically
have on UFCF?
Increases UFCF
Negative working capital usually implies cash inflow from operations, boosting
UFCF.
6. Terminal value using the perpetuity growth method is most sensitive to
changes in:
Discount Rate and Growth Rate
Small changes in these assumptions can significantly change terminal value.
7. Why do we add back depreciation in UFCF?
It’s a non-cash expense
Depreciation reduces EBIT but doesn’t consume cash, so it’s added back.
8. In a DCF, how many years of forecast is standard?
5–10 years
Forecasting too far becomes unreliable; 5–10 years balances detail and reliability.
9. What does the DCF model primarily measure?
Intrinsic value
It estimates the present value of future cash flows.
10.What type of growth rate is used in the terminal value formula?
, Long-term perpetual growth rate
This rate reflects stable, mature growth beyond the forecast period.
11.A higher WACC will:
Lower the DCF valuation
Higher discount rates reduce the present value of future cash flows.
12.What is the best proxy for the risk-free rate in a WACC?
10-year Treasury yield
It represents a stable, low-risk return for U.S. investments.
13.Why is beta used in cost of equity calculations?
It measures systematic risk relative to the market
Beta quantifies how a stock moves compared to the market, informing cost of
equity.
14.Cost of equity is calculated using:
CAPM
The Capital Asset Pricing Model (CAPM) estimates cost of equity using beta.
15.What effect does higher leverage (debt) have on WACC, all else equal?
May lower WACC due to tax shield
Debt interest is tax-deductible, potentially lowering WACC, up to a point.
16.Which of the following is not included in WACC?
Dividends paid
WACC includes capital costs, not dividends, which are returns.
17.If cost of debt increases, WACC:
