IBIG-04-05-Valuation-DCF-Analysis Questions and Correct Answers
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Course
Discounted Cash Flow
Institution
Discounted Cash Flow
Name as many valuation methods as you can 1. Discounted cash flow analysis 2. Public company comparables 3. Precedent transactions analysis
4. Leveraged buyout analysis 5. Dividend discount model 6. Liquidation valuation 7. M&A premiums analysis 8. Future share price analysis 9. Sum of parts 10. A...
IBIG-04-05-Valuation-DCF-Analysis
Questions and Correct Answers
Name as many valuation methods as you can ✅1. Discounted cash flow analysis
2. Public company comparables
3. Precedent transactions analysis
4. Leveraged buyout analysis
5. Dividend discount model
6. Liquidation valuation
7. M&A premiums analysis
8. Future share price analysis
9. Sum of parts
10. Adjusted present value (APV) analysis
11. Embedded value methodology
12. Net asset value model
13. Residual income valuation
What are the three ways that lowering tax can affect a DCF valuation? ✅1. Increasing
your free cash flows
2. Increasing your cost of debt
3. Increasing your levered beta
In a DCF valuation, which of the following 3 actions increases the valuation the most: a
$10 decrease in capital expenditures, a $10 decrease in expenses or a $10 increase in
revenues? ✅The formula for unlevered free cash flow is EBIT*(1-Tax Rate) + Non-
Cash Charges - Changes in NWC - CapEx. Given that a $10 change in expenses or
revenues would be tax-affected, CapEx would likely have a larger impact.
However, if we're using the multiples method and the impact on the terminal value
would far outweigh the impact from the summation of cash flows, this could bring the
answer in a different direction. So, it depends
Would a SAAS technology company or a wholesale retail company have higher net
operating working capital. Why is working capital negative for SAAS typical?
✅Retailer: Positive working capital due to high inventory balances required to sustain
their business and drive revenue
SAAS: Negative because of high deferred revenue (typically from subscription services)
What are the nuances of valuing a private company? ✅It's tougher to calculate the
Cost of Equity and WACC because a private company doesn't have a "current" capital
structure or Market Cap, so you have to look at the capital structures of similar public
, companies to determine the appropriate percentages. You also usually apply a liquidity
discount
Explain the change in operating working capital part of the free cash flow calculation
✅Operating working capital affects your cash flow. If it goes up from one year to
another, that is a cash outflow (assets increase by more than liabilities), hence why you
subtract it
When you look up betas online, what kind of beta do you get and how do you adjust for
it? ✅When you find betas on Google Finance, Yahoo Finance, or Bloomberg, you get
the levered beta which reflects the inherent business risk and the risk from leverage
You adjust for it by using a formula to convert it to unlevered beta (to remove the risk
from leverage), then you convert it to levered beta using your company's capital
structure
How are dividends factored (or not factored) into Cost of Equity ✅They are included in
CAPM as it provides returns in excess of market
The CAPM (cost of equity) tells you how much a company's stock "should" return each
year, on average, over the long term, factoring in both stock price appreciation and
dividends.
How do I know when a company's WACC is at it's optimal level ✅It is optimal when
WACC is minimized. You can use partial derivatives with respect to each security and
find the value that minimizes WACC
How does issuing more equity affect Enterprise value in a DCF ✅Depends on the
current capital structure. Is there a healthy level of debt? If so, then increase because
cost of equity is greater than cost of debt typically. Otherwise decrease.
How does the Gordon Growth formula work intuitively? When should I use Gordon
Growth vs Terminal Multiples? ✅The GGM formula computes a geometric sum to
infinity that converges to 0. You should usually use both to sanity check your terminal
value.
Gordon Growth is necessary for long-term investments that are nearer to their "steady
state," whereas the multiples method may be more appropriate for something like a high
growth tech company that is yet to reach maturity.
What do I do if the country the company is in is not risk-free, ie. treasuries are not AAA
rated. How do I get the risk-free rate? ✅You can apply a default spread to a country
that does have AAA yields. For example, for a company in Greece, you could use the
risk-free rate of a neighboring developed economy such as France, the UK, or Germany
and apply an interest rate spread
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