:DISCOUNTED CASH FLOW MODEL
EXAM WALL STREET PREP 2024
DISTINCTION GUARANTEED
1. What is the Discounted Cash Flow (DCF) model?
Answer: The DCF model is a valuation method used to estimate the value of an
investment or company based on the present value of its projected future cash
flows. The formula is: DCF=CF1(1+r)1+CF2(1+r)2+⋯+CFn(1+r)n\text{DCF} = \
frac{CF_1}{(1 + r)^1} + \frac{CF_2}{(1 + r)^2} + \cdots + \frac{CF_n}{(1 +
r)^n}DCF=(1+r)1CF1+(1+r)2CF2+⋯+(1+r)nCFn where CFCFCF represents the
cash flow at each period, and rrr is the discount rate.
2. How do you determine the discount rate in a DCF model?
Answer: The discount rate is typically the Weighted Average Cost of Capital (WACC)
for a company. It accounts for the cost of equity and the cost of debt, weighted
according to their proportions in the company’s capital structure. The WACC is
calculated as: WACC=(EE+D×re)+(DE+D×rd×(1−T))\text{WACC} = \left(\frac{E}
{E + D} \times r_e\right) + \left(\frac{D}{E + D} \times r_d \times (1 - T)\
right)WACC=(E+DE×re)+(E+DD×rd×(1−T)) where EEE is the market value of
equity, DDD is the market value of debt, rer_ere is the cost of equity, rdr_drd is the
cost of debt, and TTT is the tax rate.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller smartguide. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $7.99. You're not tied to anything after your purchase.