Question 1

What is a DCF (Discounted Cash Flow) valuation?

Accepted Answer

A DCF valuation estimates what a company is worth today by projecting its future cash flows and discounting them back to present value using a required rate of return (typically WACC). It is one of the most widely used intrinsic valuation methods in finance.

Question 2

What is Unlevered Free Cash Flow?

Accepted Answer

Unlevered Free Cash Flow (UFCF) is the cash a business generates from operations after reinvesting in the business, but before any debt payments. It represents the cash available to all capital providers — both equity and debt holders — making it the standard cash flow metric used in DCF valuations.

Question 3

What is the difference between Levered FCF and Unlevered FCF?

Accepted Answer

Levered FCF (also called Free Cash Flow) is Operating Cash Flow minus CapEx — it includes interest payments, so it represents cash available to equity holders. Unlevered FCF is calculated from EBIT and excludes interest entirely, representing cash available to all capital providers (debt + equity). DCF models use Unlevered FCF because it isolates operational performance from financing decisions.

Question 4

What is WACC (Weighted Average Cost of Capital)?

Accepted Answer

WACC is the blended rate of return a company must earn to satisfy all its capital providers — both debt holders and equity shareholders. It weights the cost of equity and cost of debt by their proportions in the company's capital structure. WACC is used as the discount rate in DCF valuations.

Question 5

What is NOPAT (Net Operating Profit After Tax)?

Accepted Answer

NOPAT is a company's operating profit after subtracting taxes but before interest payments. It represents the profit generated by core operations available to all capital providers. NOPAT is the starting point for calculating Unlevered Free Cash Flow in a DCF model.

Question 6

What is EBIT vs EBITDA?

Accepted Answer

EBIT (Earnings Before Interest and Taxes) measures operating profit including depreciation and amortization. EBITDA adds back D&A to approximate operating cash flow. EBIT is more conservative and reflects the real cost of asset wear; EBITDA is useful for comparing companies with different capital intensity.

Question 7

What is Terminal Value in a DCF model?

Accepted Answer

Terminal value represents the value of all cash flows beyond the explicit forecast period in a DCF model. Since you can't project cash flows forever, terminal value captures the company's remaining value at the end of your forecast. It typically accounts for 60–80% of total enterprise value in a DCF.

Question 8

What is a Sensitivity Analysis?

Accepted Answer

Sensitivity analysis tests how changes in key assumptions affect a model's output. In a DCF, it typically varies WACC and terminal growth rate (or exit multiple) to show a range of possible valuations. This helps investors understand which assumptions matter most and how robust the valuation is.

Question 9

What is Net Debt?

Accepted Answer

Net Debt is a company's total debt minus its cash and cash equivalents. It represents the actual debt burden after accounting for available cash. In a DCF valuation, net debt is subtracted from enterprise value to arrive at equity value (what shareholders own).

Question 10

What is an Exit Multiple?

Accepted Answer

An exit multiple is the valuation multiple (typically EV/EBITDA) applied to the final forecast year in a DCF model to estimate terminal value. It represents what a buyer might pay for the business at the end of the projection period, using comparable company or transaction multiples as a benchmark.

Question 11

What is Beta in investing?

Accepted Answer

Beta measures a stock's volatility relative to the overall market. A beta of 1.0 means the stock moves in line with the market; above 1.0 means more volatile, below 1.0 means less volatile. Beta is a key input in the CAPM formula used to calculate the cost of equity, which feeds into WACC.

Question 12

What is the Risk-Free Rate?

Accepted Answer

The risk-free rate is the theoretical return on an investment with zero risk of default, typically proxied by the yield on 10-year U.S. Treasury bonds. It serves as the baseline return in the CAPM formula and is a key component of WACC, representing the minimum return any investor should expect.

Question 13

What is Enterprise Value vs Equity Value?

Accepted Answer

Enterprise Value (EV) represents the total value of a business to all capital providers (debt + equity). Equity Value (market capitalization) represents only the value belonging to shareholders. The bridge: Equity Value = Enterprise Value − Net Debt. A DCF model calculates Enterprise Value first, then derives Equity Value.

Question 14

What is EPS (Earnings Per Share)?

Accepted Answer

EPS is a company's net income divided by its shares outstanding. It tells you how much profit the company earned per share of stock. EPS is one of the most widely followed metrics in investing and is the basis for the P/E (price-to-earnings) ratio.

Question 15

What is Free Cash Flow Margin?

Accepted Answer

Free Cash Flow Margin is free cash flow divided by revenue, expressed as a percentage. It measures how efficiently a company converts revenue into cash. A higher FCF margin indicates a more capital-efficient business that generates more cash per dollar of sales.

Learn

Valuation