Hi All,
I have some interviews coming up that involve DCF testing (I believe using unlevered FCF). I understand the basic principles behind it, but I can't seem to find any practice models online.
The tests are mainly 1hr (some 2 hr) and i think will involve a template that needs to be filled in.
Can anyone share a few practice DCFs (for me to have a mock go at), or what tricks/unexpected items they may chuck in to complicate?
Thanks all
I think you need theoretical basis in financial forecasting. If you already know the theoretical aspects of DCF and you have some ideas on forecasting I suggest you to try to put it in practice.
Take a SEC 10-k and try to forecast those figures relevant to DCF (EBITDA, NWK, capex, debt etc.) using excel. It entails making assumptions (operative and financial) on the measures mentioned before looking at (i) the company-specific trends and (ii) the industry trends from both a historical and perspective points of view.
You can probably find the cost of debt on the 10-k in order to calculate the Wacc and you can apply a CAPM (+ adjustments) or a mere arbitrary cost of equity estimate.
The academic theory suggests using the perpetuity formula to calculate the Terminal value, but it is also useful adopt a market multiple to work out it.
The time horizon should be 3 or 5 years or, someone told me to work on a range of time until when annual capex will be equal or less than annual D&Aexpense.
Always, always, always rely on target (future) capital structure and market values for debt and pay attention on non-recourring items like restructuring expenses and sale of assets if you start the DCF calculation from net income rather than Ebitda.
I’ve always been told that even a 5-year forecast is a stretch and anything beyond that isn’t very helpful though. Purely because no one can read so far into the future.
But I agree, practicing on actual companies beats doing any practice question you can find out there. It’s a little bit daunting at first cause of how much you have to read but you have to tackle it sooner or later anyway.
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