CFM CFM Valuation Methods & DCF Modeling

Question 1

In a Discounted Cash Flow (DCF) model, which rate is used to discount projected free cash flows back to present value?

Accepted Answer

Weighted Average Cost of Capital (WACC)

Answer

The WACC reflects the blended cost of all capital sources and is the standard discount rate applied to unlevered free cash flows in a DCF model.

Question 2

What does the terminal value in a DCF model represent?

Accepted Answer

The present value of all cash flows beyond the explicit forecast horizon

Answer

Terminal value captures the value of a business beyond the explicit forecast period, often representing the majority of total DCF value.

Question 3

Which of the following is the correct formula for unlevered free cash flow (UFCF)?

Accepted Answer

EBIT × (1 - Tax Rate) + D&A - CapEx - Change in NWC

Answer

UFCF starts with after-tax EBIT, adds back non-cash charges, then subtracts capital expenditures and the change in net working capital.

Question 4

When using the Gordon Growth Model to calculate terminal value, which assumption is most critical?

Accepted Answer

The perpetual growth rate of free cash flows

Answer

The perpetual growth rate (g) has an outsized impact on terminal value because small changes compound indefinitely in the perpetuity formula.

Question 5

In comparable company analysis (Comps), which multiple is most useful for comparing companies with different capital structures?

Accepted Answer

EV/EBITDA

Answer

EV/EBITDA is capital-structure-neutral because enterprise value and EBITDA are both pre-debt metrics, making cross-company comparisons more meaningful.

CFM - Certified Financial Modeler Practice Test

CFM - Certified Financial Modeler Practice Test

CFM CFM Valuation Methods & DCF Modeling