Practice

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

A company's explicit-period FCF is $60M in Year 1, $65M in Year 2, and $70M in Year 3. Its WACC is 10%, and its Terminal Value at the end of Year 3 is $900M. Calculate its Enterprise Value.

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?

Using CAPM, what's the Cost of Equity for a company with a Risk-Free Rate of 3.5%, a Beta of 0.9, and an Equity Risk Premium of 5.5% (rounded to one decimal)?

A company's capital structure is $700M of Equity, $200M of Debt, and $100M of Preferred Stock (at market value). Its Cost of Equity is 10%, its pre-tax Cost of Debt is 6%, its Cost of Preferred is 8%, and its tax rate is 25%. Build its WACC.

A comparable company has a Levered Beta of 1.5, a Debt/Equity ratio of 0.6, and a 25% tax rate. What's its Unlevered Beta (rounded to two decimals)?

A company's Enterprise Value is $2,000M. It has $100M of Cash, $300M of Debt, no Preferred Stock, and 100M diluted shares outstanding. What's its Implied Share Price?

A company's final projected year of FCF is $100M, its WACC is 9%, and its Terminal Growth Rate is 2%. What's its Terminal Value under the Perpetuity Growth Method?

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

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

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

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

Same 10-year DCF, stub-adjusted period of 9.334 for the last forecast year, but this time using the Multiples Method for Terminal Value. What discount period should you use?

A company has EBIT of $120M, a 21% tax rate, D&A of $30M, CapEx of $45M, and a decrease in Net Working Capital of $8M. What's its Unlevered FCF?

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?

You're valuing a company on April 30th (245 days remain in the 365-day year) and using both a stub period and the mid-year convention. What's the discount period for the first year's cash flow?

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

Using CAPM, what's the Cost of Equity for a company with a Risk-Free Rate of 4%, a Beta of 1.2, and an Equity Risk Premium of 6%?

How do you calculate WACC?

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?

A company's final projected year of FCF is $70M, its WACC is 8%, and its Terminal Growth Rate is 2.5%. What's its Terminal Value under the Perpetuity Growth Method?

What is terminal value and how do you calculate it?

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

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

A company's final projected year of EBITDA is $120M, and you're assuming an 8.0x exit multiple. What's its Terminal Value under the Multiples Method?

A company has EBIT of $200M, a 28% tax rate, D&A of $40M, CapEx of $60M, and an increase in Net Working Capital of $10M. What's its Unlevered FCF?

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

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?

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

A company has $1,000 of NOLs at a 25% tax rate. The NOLs expire in Year 3, and the company expects $200 of Pre-Tax Income each year in Years 1 through 3. What Valuation Allowance should it record against the NOL Deferred Tax Asset?

Comp A has a Levered Beta of 1.3, Debt/Equity of 0.5, and a 25% tax rate. Comp B has a Levered Beta of 1.1, Debt/Equity of 0.2, and the same 25% tax rate. Your target company has a Debt/Equity ratio of 0.4 and the same 25% tax rate. Unlever both comps, average them, and relever for the target.

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

A company's Unlevered Beta (from comps) is 0.9. Its own target Debt/Equity ratio is 0.8 and its tax rate is 21%. What's its relevered (Levered) Beta, rounded to two decimals?

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

A target company has $800M of Equity Value and $200M of Debt. The unlevered Beta from its comps is 0.85, its tax rate is 25%, the Risk-Free Rate is 4%, the Equity Risk Premium is 5.5%, and its pre-tax Cost of Debt is 6%. Build its WACC from scratch.

Walk me through how you'd build a DCF.

A company has $750M of Equity and $250M of Debt. Its Cost of Equity is 10%, its Cost of Debt is 5%, and its tax rate is 30%. What's its WACC (rounded to one decimal)?

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

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?

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

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

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

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

A 10-year DCF values a company on August 31st, giving a stub-adjusted discount period of 9.334 for the final explicit forecast year. Calculate the Terminal Value discount period under both the Multiples Method and the Perpetuity Growth Method (with the mid-year convention), and explain why they differ.

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?

A single $100M cash flow arrives in Year 3 of a DCF with a 10% WACC. Calculate its Present Value using a standard (year-end) discount period, then again using the mid-year convention, and compare.

A 10-year DCF has a stub-adjusted discount period of 9.334 for the last explicit forecast year. Under the Perpetuity Growth Method with the mid-year convention applied, what discount period should you use for the Terminal Value?

A company has $600M of Equity and $400M of Debt in its capital structure (at market value). Its Cost of Equity is 12%, its Cost of Debt is 6%, and its tax rate is 25%. What's its WACC?

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

A company's Enterprise Value is $1,500M. It has $80M of Cash, $250M of Debt, $40M of Preferred Stock, and 60M diluted shares outstanding. What's its Implied Share Price?

A company's final projected year of FCF is $50M, its WACC is 10%, and its Terminal Growth Rate is 3%. What's its Terminal Value under the Perpetuity Growth Method?

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

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

A company has EBIT of $80M, a 25% tax rate, D&A of $15M, CapEx of $20M, and an increase in Net Working Capital of $5M. What's its Unlevered FCF?

A DCF's Terminal Value is $1,000M, the Discount Rate is 10%, and the Terminal Value falls at the end of Year 5. What's the Present Value of the Terminal Value?

Using CAPM, what's the Cost of Equity for a company with a Risk-Free Rate of 4.5%, a Beta of 1.4, and an Equity Risk Premium of 5%?

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

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

A company projects $500M of Revenue with a 20% EBIT margin, a 25% tax rate, $25M of D&A, $35M of CapEx, and an $8M increase in Net Working Capital. Build its Unlevered FCF.

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

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

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?

A comparable company has a Levered Beta of 1.8, a Debt/Equity ratio of 1.0, and a 28% tax rate. What's its Unlevered Beta (rounded to two decimals)?

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

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

A company's NTM TEV/EBITDA multiple is 10.0x, and its projected EBITDA 12-24 months from now is $180M. At that future date it's expected to have $200M of Net Debt and 40M diluted shares. Its Cost of Equity is 9%, and that future point is 2 years away. Calculate the Implied Future Share Price and its Present Value today.

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?

How does depreciation affect free cash flow in a DCF?

A company's NTM TEV/EBITDA multiple is 10.0x, and its projected EBITDA for the 12-24 month period from now is $180M. What's its Future Enterprise Value in a Future Share Price Analysis?

A company has $900M of Equity and $300M of Debt. Its Cost of Equity is 11%, its Cost of Debt is 7%, and its tax rate is 24%. What's its WACC (rounded to one decimal)?

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

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?

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?

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

A company's Enterprise Value is $1,200M. It has $150M of Cash, $300M of Total Debt, $50M of Preferred Stock, $20M of Noncontrolling Interests, and 80M diluted shares. Bridge from Enterprise Value to Implied Share Price.

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

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?

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

A company's final projected year of FCF is $80M and EBITDA is $150M. Its WACC is 9%, and you're assuming a 2.5% Terminal Growth Rate. Calculate the Terminal Value via the Perpetuity Growth Method, then cross-check it by calculating the implied exit multiple.