Chapter 6

Question 1

What does DCF stand for?

Answer 1

Discounted Cash Flow

Question 2

True or False: The DCF method is used to estimate the value of an investment based on its expected future cash flows.

Answer 2

True

Question 3

In a DCF analysis, cash flows are adjusted for what factor?

Answer 3

Time value of money

Question 4

What is the formula for calculating the present value of future cash flows?

Answer 4

PV = CF / (1 + r)^n

Question 5

Fill in the blank: The discount rate reflects the ___ of capital.

Answer 5

Cost

Question 6

What is typically used as the discount rate in a DCF analysis?

Answer 6

Weighted Average Cost of Capital (WACC)

Question 7

Multiple Choice: Which of the following is NOT a component of cash flow in DCF?

Answer 7

Depreciation

Question 8

What does WACC stand for?

Answer 8

Weighted Average Cost of Capital

Question 9

True or False: Terminal value is included in a DCF analysis to account for cash flows beyond the forecast period.

Answer 9

True

Question 10

Short Answer: What are the two main approaches to calculating terminal value?

Answer 10

Gordon Growth Model and Exit Multiple Method

Question 11

Fill in the blank: In DCF, cash flows are generally projected for a period of ___ to ___ years.

Answer 11

5 to 10

Question 12

What is the purpose of adjusting cash flows for inflation in DCF?

Answer 12

To reflect real purchasing power

Question 13

Multiple Choice: Which of the following is a key assumption in DCF modeling?

Answer 13

Future growth rates

Question 14

True or False: DCF is the only method used for business valuation.

Answer 14

False

Question 15

What does the term ‘free cash flow’ refer to?

Answer 15

Cash generated by a company after accounting for capital expenditures

Question 16

Fill in the blank: The DCF method is sensitive to changes in ___ and ___ assumptions.

Answer 16

Growth rate and discount rate

Question 17

Short Answer: What is one advantage of using DCF for valuation?

Answer 17

It focuses on intrinsic value based on cash generation.

Question 18

Multiple Choice: Which document is typically used to forecast cash flows?

Answer 18

Financial statements

Question 19

What is the primary limitation of DCF analysis?

Answer 19

It relies heavily on estimates and assumptions.

Question 20

True or False: DCF analysis can be applied to any type of investment.

Answer 20

False

Question 21

Short Answer: What is a common mistake when conducting DCF analysis?

Answer 21

Overly optimistic cash flow projections.

Question 22

Fill in the blank: The terminal value can be calculated using the ___ model or the ___ method.

Answer 22

Gordon Growth; Exit Multiple

Question 23

What does the ‘risk-free rate’ represent in a DCF analysis?

Answer 23

The return expected from an investment with zero risk.

Question 24

Multiple Choice: Which component is NOT typically included in cash flow projections?

Answer 24

Interest expenses

Question 25

True or False: A higher discount rate results in a lower present value of future cash flows.

Answer 25

True

Question 26

Short Answer: What is the purpose of sensitivity analysis in DCF?

Answer 26

To assess how changes in assumptions affect valuation.

Question 27

Fill in the blank: DCF valuation is particularly useful for ___ companies with predictable cash flows.

Answer 27

Mature

Question 28

What is an alternative to DCF for valuing companies?

Answer 28

Comparable company analysis

Question 29

True or False: DCF analysis only considers quantitative factors.

Answer 29

False

Question 30

Multiple Choice: What is the purpose of discounting future cash flows?

Answer 30

To determine their present value.

Question 31

Short Answer: Why is it important to have a clear understanding of a company's business model when performing DCF?

Answer 31

It affects the accuracy of cash flow projections.

Question 32

Fill in the blank: The ___ approach to terminal value assumes a constant growth rate.

Answer 32

Gordon Growth

Question 33

What is the impact of increasing the forecast period in a DCF model?

Answer 33

It may provide a more accurate valuation.

Question 34

True or False: Cash flows should be discounted at the same rate regardless of risk.

Answer 34

False

Question 35

Multiple Choice: Which of the following is a cash flow adjustment in DCF?

Answer 35

Working capital changes

Question 36

Short Answer: What is a common characteristic of companies suitable for DCF analysis?

Answer 36

Stable and predictable cash flows.

Question 37

Fill in the blank: The DCF method is often used in ___ and investment analysis.

Answer 37

Corporate finance

Question 38

What is the role of market conditions in DCF analysis?

Answer 38

They influence the discount rate and growth assumptions.

Question 39

True or False: DCF valuation is universally accepted as the best method for all types of assets.

Answer 39

False

Question 40

Short Answer: What should be included in a DCF model's assumptions section?

Answer 40

Key growth rates, discount rates, and cash flow projections.

Question 41

Fill in the blank: A ___ growth rate is used in the Gordon Growth Model.

Answer 41

Perpetual

Question 42

What is the effect of overestimating cash flows in DCF?

Answer 42

It leads to inflated valuations.

Question 43

Multiple Choice: The terminal value is calculated at the end of the forecast period using which method?

Answer 43

Gordon Growth Model or Exit Multiple Method

Question 44

True or False: Discount rates should be adjusted for risk factors specific to the investment.

Answer 44

True

Question 45

Short Answer: What is the significance of the discount rate in DCF?

Answer 45

It reflects the opportunity cost of capital.

Question 46

Fill in the blank: The DCF model requires both ___ and ___ projections.

Answer 46

Revenue; expense