DCF DCF Equity Value and Enterprise Value

Question 1

What is the difference between enterprise value (EV) and equity value in a DCF analysis?

Accepted Answer

EV represents the value of the entire business; equity value is what remains for shareholders after deducting net debt

Answer

Enterprise value captures the total business value (for all capital providers), while equity value subtracts net debt to isolate the value attributable to shareholders.

Question 2

In a DCF model using unlevered free cash flows (UFCF), what do you arrive at after discounting at WACC?

Accepted Answer

Enterprise value

Answer

Discounting UFCF at WACC produces enterprise value because UFCF is pre-debt, reflecting cash available to all capital providers.

Question 3

To convert enterprise value to equity value in a DCF, which of the following adjustments is made?

Accepted Answer

Subtract net debt (total debt minus cash)

Answer

Equity value equals enterprise value minus net debt (total debt minus cash), reflecting what shareholders own after all debt obligations are settled.

Question 4

Which DCF approach directly produces equity value without first calculating enterprise value?

Accepted Answer

Levered free cash flow (LFCF) discounted at the cost of equity

Answer

Discounting levered free cash flows (which are after debt service) at the cost of equity directly yields equity value.

Question 5

A company has an enterprise value of $500M, total debt of $120M, and cash of $20M. What is its equity value?

Accepted Answer

$400M

Answer

Equity value = EV – net debt = $500M – ($120M – $20M) = $500M – $100M = $400M.

DCF - Discounted Cash Flow Practice Test

DCF - Discounted Cash Flow Practice Test

DCF DCF Equity Value and Enterprise Value