Practice

If you were valuing a company's equity directly using free cash flow to equity (FCFE), what discount rate would you use, and why is that different from a standard DCF?

Where does the Cost of Preferred Stock rank between Cost of Debt and Cost of Equity, and why?

Why do you use unlevered free cash flow instead of levered free cash flow in a standard DCF?

What are the different ways you can estimate the Equity Risk Premium?

How does depreciation affect free cash flow in a DCF?

Why is a Levered DCF generally not recommended, even though it directly produces Implied Equity Value?

Why must every line item in Unlevered FCF be available to all investor groups, not just equity holders?

Why do smaller companies generally have a higher WACC than larger companies, all else equal?

How do you handle Net Operating Losses in a DCF's bridge from Enterprise Value to Equity Value?

Why do Noncontrolling Interests and Equity Investments in associate companies get excluded from Unlevered FCF projections?

Why is the Perpetuity Growth Method generally considered more theoretically sound than the Multiples Method for calculating Terminal Value?

Two companies produce identical total Free Cash Flow over 10 years. Company A earns 90% of it in Year 1; Company B earns it evenly across all 10 years. Which has the higher DCF valuation, and why is this a trick question?

Why is it problematic to run a DCF on an early-stage biotech with no approved products and no reliable cash flow forecast?

Walk me through how you'd build a DCF.

What's the difference between levered and unlevered free cash flow?

Why should the Terminal Growth Rate never exceed the long-term GDP growth rate of the company's economy?

The APV method explicitly captures the tax benefit of debt that a standard Unlevered DCF only captures indirectly through WACC. Why do we still generally recommend against using it?

When calculating WACC, should you use Total Debt or Net Debt, and does the choice matter?

You're valuing a company partway through its fiscal year, and it has already reported some results for the current year. Why use a 'stub period' instead of a full first forecast year?

How do you calculate WACC?

Would increasing revenue growth by 1 percentage point or increasing the Discount Rate by 1 percentage point make a bigger impact on a DCF's value?

What's the fundamental idea behind a DCF, and how does it differ from a relative valuation method?

What is a Normalized Terminal Year, and when would you need one?

If you chose to count Operating Leases as a form of capital in a DCF, what would actually change?

If you use the Multiples Method to calculate Terminal Value, should you use multiples from Public Comps or Precedent Transactions?

How do you treat a convertible bond when calculating a company's Cost of Debt for WACC?

Why do practitioners generally use the Unlevered DCF rather than the Levered DCF or APV Analysis?

The 2019 accounting rule change put Operating Leases on the balance sheet for the first time. Did this meaningfully change how you build a DCF?

What are some of the key flaws or limitations of a DCF?

What are the main mechanical differences between a Levered DCF and a standard Unlevered DCF?

How does a higher corporate tax rate affect WACC, and does it make a DCF's Implied Value go up or down overall?

What is terminal value and how do you calculate it?

Why do you use market values, not book values, of Equity and Debt when calculating WACC's capital structure weights?

For a 10-year explicit forecast period, why do you discount the Terminal Value using a discount period of 10, not 11, even though Terminal Value represents cash flows starting in Year 11?

A company's diluted share count includes dilution from in-the-money options. Should you also account for its out-of-the-money options in a DCF?

If a company's Free Cash Flow is growing 15% in the final year of your explicit forecast but you've assumed a 2% Terminal Growth Rate, what's wrong, and how would you fix it?

Why does using the mid-year convention increase a DCF's Implied Value?

What does a negative Beta mean, and is it realistic for most companies?

Why does Cost of Equity tend to be higher than Cost of Debt for the same company?

Why do you exclude Stock-Based Compensation when calculating Unlevered FCF, even though it's a non-cash add-back on the Cash Flow Statement?

What does an Adjusted Present Value (APV) analysis add on top of a standard Unlevered DCF?

You're valuing a company in a country whose government bonds aren't considered risk-free. How do you adjust the Risk-Free Rate?

True or false: counting Operating Leases as a form of capital in WACC always reduces WACC.

What's the difference between a company's Current Enterprise Value and the Implied Enterprise Value from a DCF, and why does the comparison matter?

Why is TEV/EBITDA considered a somewhat flawed multiple for estimating Terminal Value, even though it's the most commonly used one?

What does the Change in Working Capital tell you about a company's business model, and why might it be positive for one company and negative for another?