Series 79 practice questionmediumDCF Analysis
Which cash flow measure is most commonly discounted in an enterprise DCF model?
- ANet income
- BEBITDA
- CDividends per share
- DUnlevered free cash flow✓ Correct answer
Explanation
Why D — Unlevered free cash flow
An enterprise DCF model discounts unlevered free cash flow (UFCF) at the WACC to arrive at enterprise value. UFCF captures operating cash generation after taxes, reinvestment needs, and working capital changes but before any financing costs. Net income includes the effect of interest and is appropriate for equity valuation models, while dividends per share would be used in a dividend discount model. EBITDA does not account for taxes or reinvestment needs.
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