Series 79 practice questionhardDCF - Circular References
A DCF model includes stock-based compensation as a non-cash add-back and as a dilution adjustment in the share count. What risk does this present?
- AUnderstating cash taxes paid
- BOverstating free cash flow by double-counting the benefit✓ Correct answer
- CIgnoring terminal value
- DFailing to account for capital expenditures
Explanation
Why B — Overstating free cash flow by double-counting the benefit
Adding back stock-based compensation as a non-cash expense while increasing share count for dilution can double-count benefits, overstating value. The other options are not direct risks from this practice.
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