Series 79 practice questioneasyDCF Analysis
In a DCF analysis, what time period do the projected cash flows typically cover before a terminal value is calculated?
- A5-10 years✓ Correct answer
- B1-2 years
- C15-20 years
- D25-30 years
Explanation
Why A — 5-10 years
The explicit forecast period in a DCF analysis typically spans 5 to 10 years, during which individual annual cash flows are projected based on detailed operating assumptions. Beyond this period, a terminal value is used to capture the remaining value of the business in perpetuity. The projection horizon is chosen to be long enough for the business to reach a steady state of growth but short enough to maintain reasonable forecast accuracy.
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