Question

The prevalent form of the DCF model in practice is the two-stage "unlevered DCF model". Which...

The prevalent form of the DCF model in practice is the two-stage "unlevered DCF model". Which of the following statements is not correct?

A.

Stage #2 calculates the terminal value by estimating the value of the company at the end of stage #1 then discounting it to the present.
B.

The enterprise value will equal Stage #1 minus Stage #2.
C.

All cash flows are discounted using the weighted average cost of capital (WACC).
D.

Stage #1 projects unlevered FCFs using mid-year assumptions for calculating the present value of periodic cash flows.
E.

Stage #1 forecast period is typically 5-10 years.
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Answer #1

Statement D, Stage #1 projects unlevered FCFs using mid-year assumptions for calculating the present value of periodic cash flows is NOT CORRECT.

The first stage is to forecast the unlevered free cash flows explicitly. The second stage is the total of all cash flows after stage 1.Cash Flows are determined by taking the assumption of company’s growth. The present value of the stage 2 cash flows is called the terminal value.

So, Except Statement D, all other statements are correct.

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