Mastering DCF Analysis: The Ultimate Quiz
kylie genner
Created 6/10/2024
Put your skills to the test with this ultimate quiz on Discounted Cash Flow (DCF) analysis. Can you score a perfect 10/10?
1. What is the main goal of a Discounted Cash Flow (DCF) analysis?
To calculate the market value of a company's stock
To determine the cumulative present value of future free cash flows
To forecast future sales growth
To assess a company's creditworthiness
2. Which element is NOT specifically mentioned as a requirement for calculating equity value from enterprise value in a DCF analysis?
Removing net debt
Adding future dividends
Subtracting other non-equity claims like pensions
Subtracting debt
3. In scenario analysis using DCF, what is typically held constant across different scenarios?
Cash flow forecasts
Discount rate
Terminal value
Equity value
4. What is the main benefit of using scenario analysis in DCF evaluations?
It simplifies the valuation process
It allows effects of cash flow differences over several years to be valued
It avoids need for cost of capital estimation
It accounts for macroeconomic factors
5. For a stable company, which factor is NOT mentioned as highly influential to the DCF valuation?
Explicit cash flow forecasts
Cost of capital
Terminal value assumptions
Random market fluctuations
6. Why is DCF less suited to valuing companies with volatile, highly cyclical cash flows?
It requires short-term cash flow forecasts only
Forecasts for long periods are difficult and unreliable
It disregards capital expenditure
It cannot quantify business risks
7. Which of the following statements BEST describes the challenge with using DCF to assess absolute value?
Analyst's forecasts might be unreliable
It requires minimal effort
It is influenced by current stock prices
External economic conditions are neglected
8. What does the implied discount rate represent in a DCF analysis?
The rate at which a business can borrow
The rate calculated based on current price and forecast free cash flows
The risk-free rate for treasury bonds
The historical average return rate
9. What aspect of a DCF analysis helps neutralize systematic errors in cash flow forecasts?
Assuming a static discount rate
Valuing percentage differences between strategies
Disregarding terminal value
Using market comparators
10. What are some non-equity claims on a business that need to be subtracted from enterprise value to calculate equity value?
Net interest and dividends
Book value of net debt
Corporate taxes
Future capital expenditures
