DISCOUNTED CASH FLOW VALUATION
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What is the core principle of DCF valuation?
Asset value today equals present value of future cash flows it generates.
When is an investment attractive based on DCF value?
When DCF Value exceeds current cost of investment, positive returns expected.
Why is WACC used as discount rate in Enterprise DCF?
Captures blended required return of equity and debt holders weighted by capital structure.
What is the main estimation risk in DCF models?
Small input errors compound across 5–10 years, materially distorting valuation.
How sensitive is DCF value to discount rate changes?
1% WACC change swings DCF value by 10–15%, especially with terminal value dominance.
What are the four essential DCF inputs?
Predicted cash flows, discount rate, growth rate, and growth pattern.
How should discount rate relate to cash flow risk?
Higher-risk cash flows require higher discount rate; lower-risk require lower rate.
Which discount rate applies to equity cash flows?
Cost of Equity (Re) for FCFE or dividend cash flows.
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