Discounted Cash Flow Analysis

Question 1

What is the main idea behind the DCF?

Answer 1

Measuring the intrinsic value of a company using the discounted sum of all future cash flows.

Question 2

What is meant by an unlevered cash flow?

Answer 2

cash flows before interest expense

Question 3

How are cash flows determined for a DCF?

Answer 3

using forecasts

Question 4

What are some issues with cash flow forecasts?

Answer 4

• May be biased
• May have incorrect assumptions

Question 5

Are cash flows subjective or objective?

Answer 5

subjective since it’s based on numerous assumptions.

Question 6

How should the result of a DCF be presented?

Answer 6

As a range, not a single estimate.

Question 7

How is the DCF range generated?

Answer 7

using sensitivity analysis

Question 8

What is the weighted average cost of capital?

Answer 8

WACC is the average after-tax cost of a company’s various capital sources, including common stock, preferred stock, bonds, and any other long-term debt. In other words, WACC is the average rate a company expects to pay to finance its assets.

Question 9

What is the equation for calculating WACC?

Answer 9

See attached image

Question 10

How do we find the cost of equity in order to calculate the WACC?

Answer 10

Capital Asset Pricing Model (CAPM)

Question 11

How do we find the cost of debt in order to calculate the WACC?

Answer 11

Bond rating