Difference between levered and unlevered DCF? Correct Answer: A levered DCF projects FCF after interest expense and interest income, where an unlevered
... [Show More] DCF projects FCF before the impact of interest. Therefore, a levered DCF attempts to value the equity portion of a company and an unlevered DCF values the company as a whole
Steps to calculating the WACC? Correct Answer: 1. Determine the target capital structure consistent with the firm's long term strategy. You can look at historical company debt to total capitalization ratios and peer companies capital structure.
2. Estimate the cost of debt/equity
3. Calculate the WACC
Why would you want to use UFCF over Levered FCF? Correct Answer: UFCF allows for apples-to-apples comparison of a company's cash flows and allows you to test out different capital structures to see the effect on the company's value.
Using UFCF you can see how much cash a company generates independent of the effects of its capital structure.
Walk me through a DCF Correct Answer: A DCF intrinsically values a company by discounting its projected free cash flows back to the present value using the WACC, and adding the present value of the terminal value of the company, calculated using either the exit multiple or perpetuity growth rate.
First, you project out the company's financials using assumptions for revenue growth, expenses, and operating working capital.
You then calculate Free Cash Flow for each year, discount it back to its present value usually using the WACC or Cost of Equity, and sum up to get the net present value of FCF's for the whole projection period .
Next, you calculate the company's terminal value using the Exit Multiple method or the Perpetuity Growth Rate method and discount that back to its present value using the WACC or Cost of Equity as well.
You add the NPV of the FCF and the PV of the terminal value of the company to get Enterprise Value for UFCF and Equity Value for Levered DCF.
Walk me through how you get from Revenue to Free Cash Flow in the projections Correct Answer: For UFCF: subtract the COGS and SG&A expenses to get EBIT. [Show Less]