Series 79 practice questionmediumDCF Analysis
A DCF model projects five years of unlevered free cash flows and a terminal value based on an exit EBITDA multiple. What is the appropriate way to discount the terminal value?
- AAt the risk-free rate
- BUsing the company's cost of debt
- CAt the equity cost of capital
- DAt the weighted average cost of capital (WACC)✓ Correct answer
Explanation
Why D — At the weighted average cost of capital (WACC)
Terminal value is discounted at WACC, which reflects the blended cost of capital. Using the cost of debt or equity alone would misstate the present value, a common pitfall.
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