“As a financial analyst, you're asked in an interview: "Strip a DCF down to its purest form — no Terminal Value, no complicated build-up. Just three steps: project the cash flow, discount it, and sum it." Walk through how you'd answer that question, using a small company's three-year free cash flow forecast to show how discounting and summing alone produce an Enterprise Value.”
As a financial analyst, you're asked in an interview: "Strip a DCF down to its purest form — no Terminal Value, no complicated build-up. Just three steps: project the cash flow, discount it, and sum it." Walk through how you'd answer that question, using a small company's three-year free cash flow forecast to show how discounting and summing alone produce an Enterprise Value.
Task: explain how a multi-year cash flow forecast collapses into a single Enterprise Value through discounting and summation alone, using a bare-bones 3-year forecast with no Terminal Value.
You are given the following free cash flow forecast and discount rate for a small company.
| Line Item | Value |
|---|---|
| Year 1 Free Cash Flow | $20.0m |
| Year 2 Free Cash Flow | $22.0m |
| Year 3 Free Cash Flow | $24.0m |
| Discount Rate (WACC) | 10.0% (0.10) |
PV = FCF / (1 + r)^n
Using this formula, compute the present value of each year's free cash flow.
EV = PV(Year 1) + PV(Year 2) + PV(Year 3)
Using this formula, sum the three present values to arrive at Enterprise Value.
Try answering out loud first — then reveal the model answer and compare.
No comments yet — be the first to ask a question.