Paper DCF

Question 1

Why do we use the mid-year convention in a DCF, and how does it affect enterprise value?

Answer 1

Assumes cash flows are received evenly throughout the year rather than year-end.

This increases the present value of FCFs slightly, leading to a higher EV (~2–5% premium). Shows more realistic timing of cash inflows.

Question 2

How do CapEx and NWC changes impact valuation in a DCF?

Answer 2

Higher CapEx → lower FCF → lower EV (unless growth is justified).

Increase in NWC (e.g., inventory build) = use of cash → lowers FCF.

Both are major uses of cash in FCF calculation.

Question 3

What are the most sensitive drivers of value in a DCF?

Answer 3

Revenue growth (affects top-line expansion)

EBITDA margins (drives operating leverage)

CapEx intensity

Working capital efficiency

Discount rate (WACC) and Terminal value assumptions (TV contributes 60–80% of total value)

Question 4

What’s more sensitive – terminal growth rate or exit multiple?

Answer 4

Both are critical. Exit multiple method is market-based and more volatile.

Gordon Growth method is smoother but sensitive to small changes in g and WACC. Use both to triangulate.

Question 5

How do you test robustness of a DCF valuation?

Answer 5

Run sensitivity tables (WACC vs. g, WACC vs. Exit Multiple)

Use scenario analysis (Base, Downside, Bull)

Check TV % of EV

Stress CapEx/NWC growth assumptions

Question 6

What’s the formulaic link between FCF and valuation in a DCF?

Answer 6

Value = PV of FCFs + PV of Terminal Value

FCF = EBIT(1–t) + D&A – CapEx – ΔNWC

Each term is a value driver → any increase in CapEx or NWC lowers FCF and thus valuation.