Series 79 practice questionmediumDCF Analysis
An investment banker is building a DCF model for a client. The company's projected unlevered free cash flow for Year 1 is $50 million, and the WACC is 10%. What is the present value of this Year 1 cash flow?
- A$45.5 million✓ Correct answer
- B$50.0 million
- C$55.0 million
- D$40.9 million
Explanation
Why A — $45.5 million
The present value of Year 1 cash flow is calculated as $50M / (1 + 0.10)^1 = $50M / 1.10 = $45.45 million, approximately $45.5 million. Each future cash flow must be discounted back to the present using the WACC to account for the time value of money and the risk associated with the business. This is the foundational calculation in any DCF analysis.
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