Model Test MM Infra Fund

Based on the most helpful WSO content, here are some key areas to focus on for your infra fund model test:

Key Areas to Focus On:

1. Equity DCF / Valuation:

   • Levered vs. Unlevered Free Cash Flow:
     • Unlevered Free Cash Flow (UFCF): Cash flow available to all investors (both debt and equity). Discounted using WACC.
     • Levered Free Cash Flow (FCFE): Cash flow available to equity investors after debt payments. Discounted using the cost of equity.

2. Cost of Equity:

   • Understand how to calculate the cost of equity using models like CAPM.
   • Be aware of how changes in capital structure can affect the cost of equity and WACC.

3. Terminal Value:

   • Terminal Equity Value: Focus on calculating the terminal value from an equity perspective rather than enterprise value.
   • Understand the implications of using different terminal value calculation methods (e.g., perpetuity growth model vs. exit multiple method).

4. WACC Components:

   • Brush up on the various components of WACC and how they interact.
   • Understand the impact of a fixed vs. dynamic capital structure on WACC.

5. Operational Improvements and De-risking:

   • Consider how operational improvements can impact cash flows and valuation.
   • Understand de-risking strategies like lease extensions and RPI swaps to reduce cash flow variability.

Additional Considerations:

• Sanity Checks:

  • Cross-reference your DCF valuation with other methodologies like comps to ensure your assumptions are reasonable.
  • Be aware of the limitations of the DCF model, such as its reliance on projections and assumptions about fixed capital structures.

• Market Value vs. Book Value:

  • Understand the differences between market value and book value, and how market value often deviates from book value due to various factors.

Summary:

• Focus on building and understanding both levered and unlevered free cash flow models.
• Be prepared to calculate and justify the cost of equity and WACC.
• Pay attention to terminal value calculations from an equity perspective.
• Brush up on general valuation concepts and the limitations of the DCF model.
• Consider operational improvements and de-risking strategies in your valuation.

By focusing on these areas, you'll be well-prepared for your infra fund model test. Good luck!

Sources: DCF Modeling Course ~ Pre-training text.pdf, Walk me through a DCF, Highest valuation, LBO vs DCF - The final answer. Perspectives on special situations.