DCF BIWS practice exam| 80 questions| with complete solution
6 views 0 purchase
Course
DCF Certification
Institution
Liberty University
Difference between levered and unlevered DCF? Correct Answer: A levered DCF projects FCF after interest expense and interest income, where an unlevered DCF projects FCF before the impact of interest. Therefore, a levered DCF attempts to value the equity portion of a company and an unlevered DCF va...
dcf biws practice exam| 80 questions| with complete solution
Written for
Liberty University
DCF Certification
All documents for this subject (8)
Seller
Follow
Classroom
Reviews received
Content preview
DCF BIWS practice exam| 80 questions| with
complete solution
Difference between levered and unlevered DCF? Correct Answer: A levered DCF projects FCF
after interest expense and interest income, where an unlevered DCF projects FCF before the
impact of interest. Therefore, a levered DCF attempts to value the equity portion of a company
and an unlevered DCF values the company as a whole
Steps to calculating the WACC? Correct Answer: 1. Determine the target capital structure
consistent with the firm's long term strategy. You can look at historical company debt to total
capitalization ratios and peer companies capital structure.
2. Estimate the cost of debt/equity
3. Calculate the WACC
Why would you want to use UFCF over Levered FCF? Correct Answer: UFCF allows for
apples-to-apples comparison of a company's cash flows and allows you to test out different
capital structures to see the effect on the company's value.
Using UFCF you can see how much cash a company generates independent of the effects of its
capital structure.
Walk me through a DCF Correct Answer: A DCF intrinsically values a company by discounting
its projected free cash flows back to the present value using the WACC, and adding the present
value of the terminal value of the company, calculated using either the exit multiple or perpetuity
growth rate.
First, you project out the company's financials using assumptions for revenue growth, expenses,
and operating working capital.
You then calculate Free Cash Flow for each year, discount it back to its present value usually
using the WACC or Cost of Equity, and sum up to get the net present value of FCF's for the
whole projection period .
Next, you calculate the company's terminal value using the Exit Multiple method or the
Perpetuity Growth Rate method and discount that back to its present value using the WACC or
Cost of Equity as well.
You add the NPV of the FCF and the PV of the terminal value of the company to get Enterprise
Value for UFCF and Equity Value for Levered DCF.
Walk me through how you get from Revenue to Free Cash Flow in the projections Correct
Answer: For UFCF: subtract the COGS and SG&A expenses to get EBIT.
, Multiply EBIT by (1-Tax rate), add back D&A, subtract CapEx, and adjust for changes in
operating assets and liabilities.
Levered: Use Net Income instead of EBIT, also subtract mandatory debt repayments
Why is a DCF with a private company hard? Correct Answer: Hard to calculate the discount rate
because the private company doesn't have a market cap or beta. You'd probably just estimate the
WACC based on a comparable company
Why do you add back non cash expenses? Correct Answer: To show that they saved the
company on taxes, but that they didn't pay for the expense in cash
What are the advantages of using a DCF? Correct Answer: Theoritecally the most accurate bc its
based on the value of the businesses future cash flows.
1) Don't care about peers because of the intrinsic nature of a dcf
2) Not influenced by temporary market conditions
3) Flexible
Disadvantages of using a DCF Correct Answer: Based on many assumptions and forecasts like
revenue growth, expenses, and EBITDA margins that are highly sensitive to slight changes and
can make the valuation vary widely.
A basic DCF also assumes a constant capital structure over the projection period
Drivers of a DCF Correct Answer: 1) FCF
2)Discount rate
3) Terminal value
What's more sensitive part of a DCF, FCF or discount rate Correct Answer: FCF
What's an alternate way to calculate Free Cash Flow aside from taking Net Income, adding back
Depreciation, and subtracting Changes in Operating Assets / Liabilities and CapEx? Correct
Answer: To get levered FCF, You take Cash Flow from Operations and subtract CapEx.
To get to UFCF, you then need to add back adjusted interest expense and subtract tax-adjusted
interest income.
What is free cash flow? Correct Answer: How much after-tax cash flow the company generates
after accounting for non-cash expenses like D&A, and real cash expenses like CapEx and
increases in net operating working capital
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller Classroom. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $8.49. You're not tied to anything after your purchase.
