DCF question post Interview?!?!?
Hi everyone.
I had my first phone interview for MS IBD group two days ago. I spoke with an Associates that went over 20 min of technical questions with me. I think I answered everything in the right way, except at one point, when he asked me to walk him through a DCF. This is how I answer:
1. You take the sum of all the projected FCF discounted to 1-WACC (normally 5 to 10 yr of FCF)
2.You add the Terminal Value to the sum of the PV of FCF
At this point he said how do you get TV?
I told him that there were 2 ways: perpetual growth and exit multiple.
He asked me what did I mean by perpetual growth. I told him that it meant that the company continues to growth a a constant rate and told him the formula.
He told me that this way didn't really exist and that they don't really use it, and to focus on the exit multiple approach.
So, I went on and told him that for the exit multiple you take EBITDA and multiply it to the multiple at which peer companies are trading. Then get PV of the TV by discounting it with WACC.
At this point he told me that there was something wrong and that I shouldn't discount it with WACC.
My questions are: Why did he say the perpetual growth method doesn't really exist? and what did I do wrong in discounting the TV with WACC? Should the TV be discounted before adding it to the PV of FCFs?
Thanks in advance guys
the dcf is real life is basically whatever the banker wants to see, which is to conclude that the dcf valuation will get you close to the offer value (for a fairness opinion) or a bit higher than the current trading value if ur on a sell side mandate (to convince buyers that the intrinsic value is better than current trading levels)
my group uses ebitda multiple method, and u discount the terminal value by whenever ur projection period is so like..if you end your projection period in 5 years, you basically do (ebitda at yr 5* ev/ebitda multiple)/(1+wacc)^5 years
You might not have been clear, he might've simply misheard you, or perhaps he wanted you to go for extra credit and ask whether to adjust waac based on the expected capital structure 5 years from now
DCF question post Interview?!?!?! (Originally Posted: 10/08/2017)
Hi everyone. I had my first phone interview for MS IBD group two days ago. I spoke with an Associates that went over 20 min of technical questions with me. I think I answered everything in the right way, except at one point, when he asked me to walk him through a DCF. This is how I answer: 1. You take the sum of all the projected FCF discounted to 1-WACC (normally 5 to 10 yr of FCF) 2.You add the Terminal Value to the sum of the PV of FCF At this point he said how do you get TV? I told him that there were 2 ways: perpetual growth and exit multiple. He asked me what did I mean by perpetual growth. I told him that it meant that the company continues to growth a a constant rate and told him the formula. He told me that this way didn't really exist and that they don't really use it, and to focus on the exit multiple approach. So, I went on and told him that for the exit multiple you take EBITDA and multiply it to the multiple at which peer companies are trading. Then get PV of the TV by discounting it with WACC. At this point he told me that there was something wrong and that I shouldn't discount it with WACC. My questions are: Why did he say the perpetual growth method doesn't really exist? and what did I do wrong in discounting the TV with WACC? Should the TV be discounted before adding it to the PV of FCFs? Thanks in advance guys
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