CAIIB · ABFM

DCF, Other Non DCF , Special cases of valuation

Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Advanced Business and Financial Management — CAIIB.

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What does DCF stand for and what is its core principle in valuation?

DCF stands for Discounted Cash Flow; it values an asset by discounting its expected future cash flows back to present value using an appropriate discount rate reflecting risk.

What is the Adjusted Present Value (APV) method in DCF valuation?

APV separates base-case NPV from financing side-effects value.

Which discount rate is most commonly used in DCF valuation of a firm's total operations?

The Weighted Average Cost of Capital (WACC) is used as the discount rate in DCF valuation of the entire firm, reflecting the blended cost of equity and debt financing.

What is the Weighted Average Cost of Capital (WACC) formula?

WACC = (E/V)*Ke + (D/V)*Kd*(1-T) blending equity and debt costs.

What is terminal value in DCF analysis and why is it significant?

Terminal value represents the present value of all cash flows beyond the explicit forecast period; it often constitutes 60–80% of total firm value, making it highly sensitive to growth rate assumptions.

What is the difference between intrinsic value and market value of a firm?

Intrinsic value is analyst-estimated; market value is stock price times shares.

How is terminal value calculated using the Gordon Growth Model in DCF?

Terminal value = FCF(n+1) / (WACC – g), where FCF(n+1) is free cash flow in the first year beyond the forecast horizon and g is the perpetual stable growth rate.

What is the Excess Return Model used to value financial firms?

It values equity as book value plus present value of excess returns over cost.

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