My thought is revenue because when modeling a DCF, you typically calculate COGS and Capex as a % of revenue. You change revenue, you change those other two components.
My interviewer didn't challenge my answer, but didn't seem 100% convinced either. Just moved on to the next question. Is there something I missed?
| +379 | Evercore Intern Seizure | 56 | 1h |
| +74 | JPM M&A is Gone??? Purely Coverage Banking??? | 33 | 1h |
| +62 | Is DCM actually underrated ? | 26 | 23m |
| +53 | How do I understand vs. just memorizing? | 9 | 2h |
| +48 | Losing my personality in Banking | 9 | 1d |
| +47 | Are all Tech / TMT groups sweaty? | 38 | 1d |
| +42 | Associate & Above IB exits | 16 | 4d |
| +33 | Incoming IB Analyst: Best Ways to Prepare? | 11 | 8h |
| +27 | Which groups are ideal for laterals? | 12 | 1d |
| +24 | Thoughts on PEI Global Partners? | 4 | 2d |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
I think it really depends and while revenue could change it since you use Capex and COGS as a % of revenue, at times Capex can be really high due to a 1 time investment during the period you are modeling out. It can drastically change your assumptions and impact your EV more than a change in revenue
I'd go capex>cogs>revenue. $1 change in capex directly flows into a $1 change in fcf, change in cogs is diminished by tax, increase in revenue usually comes with an increase in cogs and tax effects too
Could you make an argument that some of the Capex would be offset by adding back D&A as part of FCFF calc?
No, you wouldn't. D&A is from past years, while CAPEX is for this year.
When I first saw the question, I thought it was ridiculous and there's no right answer. But I think this answer is probably what the interviewer wanted to hear.
I'd say CapEx first because it's not a tax-effected value. Then revenue because of the idea of operating leverage and that operating income should increase by a higher percentage than revenue due to spreading out of fixed costs over more product sold. Lastly, COGS because EBIT would go down and same with tax effected EBIT. Also, any changes in COGs are accounted for in NWC because of inventory, so there's less of an overall effect in UFCF by changes in COGs. My answer is assuming that we are looking at the difference between a $x increase in all of these variables and that we are looking at the absolute value impact on UFCF and not caring about sign/direction.
So I'd say in general CapEx, then Revenue, and then COGs. Of course always start your answer for these types of questions with "it depends... but." Could be terribly wrong though what I do know lol. Can't even get a first round for a BB let alone a super.
Are we looking at the magnitude impact of a DCF, as the amount implied EV changes by in either direction? Or, are all of these in a particular direction and we are looking at that same direction?
You should preface this answer with a disclaimer of sorts, as DCF is the most assumption heavy model, and depending on these assumptions (rev growth, margin growth, etc.) your results could vary.
Like all these weird technicals, I think its more about the explanation than the actual answer. That being said, I would probably say something similar to what you said in acknowledging that revenue is, at the end of the day, the primary driver of FCF, but you missed a lot of nuance. Like other people have said, a $1 change in revenue != a $1 change in FCF (probably closer to 20 cents), whereas Capex followed by COGS will have more of an impact for a dollar change. It's definitely a tricky question though and I think they're just looking for you to show understanding of a DCF. If it were me I'd also clarify what they mean by 'impact' because that can definitely change the answer.
Should be revenue on the assumption revenue is driven by a hike in price.
Your cogs wouldn't increase. Additionally, capex being decreased wouldn't move the needle by much since you are foregoing any tax advantages with depreciation.
which BB, if you don't mind me asking? I feel like I've gotten a similar variant of this question...
This is a subjective question because it will fundamentally depend on the kind of business you are valuing. For example, if it's a company that invests heavily in Capex, e.g. manufacturing, CAPEX will significantly impact the DCF. Alternatively, if this is a business that is very heavy on the top-line, then I guess revenue should affect the most, although revenue and COGS will usually move in the same direction most times but not all the time( A company is doing quite well if its GP margins are increasing).
Follow
You should first clarify the questions: is this an absolute of relative change (% of a metric) and what is the relative magnitude of the numbers in case of the latter?
Absolute change ($1) or growth (1%) (revenue growth for example)
One-off: Capex $1 increase impact > COGS > revenue. Reasons: due to corporate tax effect. $1 revenue increase only results in $1 incrase in gross profit (due to COGS), so COGS impact > revenue impact.
Relative change in assumption (+1% point in assumptions)
COGS > Revenue or equal
+/-1% assumption for COGS as % of Revenue has a high impact on FCF: if you make a 40% gross margin and you decrease that to 39%, that applies to ALL revenue, not just the marginal: you win/lose 1% EBITDA margin from that year on. Revenue growth +1% only results in an incrase in gross profit of less than 1% (gross margin) IF you assume stable gross margin. If you increase revenue solely by price increases, than the effect of COGS and revenue is the same.
Capex depends on driver of capex.
Note that increase of these assumptions impacts your full forecast, not only the year you adjust. So if you add 1% to revenue growth in T+1, T+2.....T+n increase as well (compounding).
Velit laudantium quo vitae labore. Ratione ipsum corporis est ullam. Omnis rem error est blanditiis dignissimos ex ullam.
Et saepe perspiciatis pariatur. Inventore provident accusantium beatae atque beatae iure rem. Hic quo tenetur consequuntur porro corrupti inventore est. Consectetur nulla blanditiis dolorem maiores consequuntur aut accusantium.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...