Corp Val Quiz: DCF & WACC Cheat Sheet
Target: Discounted Cash Flows & Weighted Average Cost of Capital.
1. WACC (The Discount Rate)
WACC is the blended cost of capital used to discount Unlevered Free Cash Flow (UFCF) to Enterprise Value.
WACC = [ (E/V) × Re ] + [ (D/V) × Rd × (1 - T) ]
- E/V: Percentage of financing that is equity.
- D/V: Percentage of financing that is debt.
- Re (Cost of Equity): Use CAPM ->
Re = Rf + Beta × (Rm - Rf).
- Rd (Cost of Debt): Yield to maturity on current debt.
- (1 - T): The tax shield. Interest is tax-deductible, making debt cheaper than equity.
Quiz Trap #1: If they give you a marginal tax rate and an effective tax rate, use the marginal tax rate for the tax shield (1-T).
Quiz Trap #2: Always use market values for Equity and Debt when calculating the weights (E/V and D/V), not book values.
2. Unlevered Free Cash Flow (UFCF)
Cash flow available to ALL investors (debt and equity) before any debt obligations are paid.
UFCF = EBIT × (1 - T) + D&A - CapEx - Δ Net Working Capital
- EBIT × (1 - T): Also known as NOPAT (Net Operating Profit After Tax).
- Add back D&A: Non-cash expenses.
- Subtract CapEx: Cash out the door to maintain/grow assets.
- Subtract Δ NWC: Increase in NWC is a use of cash (subtract it). Decrease is a source of cash (add it).
Quiz Trap #3: Do NOT subtract interest expense in UFCF. You are calculating cash flow before debt service. WACC accounts for the cost of debt.
3. Terminal Value (TV)
Captures the value of all cash flows beyond the explicit forecast period (typically year 5 or 10).
Gordon Growth Model: TV = FCFn+1 / (WACC - g)
- FCFn+1: The cash flow in the first year *after* your forecast period.
- g: Long-term perpetual growth rate (usually matches GDP or inflation, 2-3%).
- Present Value of TV: You must discount the TV back to Year 0.
PV(TV) = TV / (1 + WACC)n
Quiz Trap #4: Terminal Value often accounts for 60-80% of total Enterprise Value. If your TV looks small, you forgot to discount it back to present value, or you discounted it by n+1 instead of n.
4. The Final Bridge
Enterprise Value (EV) = PV of Explicit FCFs + PV of Terminal Value
Equity Value = EV - Debt - Preferred Stock - Minority Interest + Cash