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Fancy answering this real-life investment banking interview question on DCF❓
What are some of the common errors made by analysts when valuing a company using DCF❓
We continue our series of how to answer DCF based valuation questions in investment banking interviews.
One of the most oft-repeated mistakes that new analysts make when valuing companies using DCF is computing FCFF incorrectly.
🚀 FCFF = CFO + CFI
CFO typically includes NOPAT + D&A + Changes in working Capital + Interest expense + Changes in DTA/DTL
The biggest snag with analysts when computing FCFF is that they use the CFO template from companies without making finer adjustments to arrive at FCFF.
So what's the hack that smart analysts use to ensure accuracy of underlying FCFF❓
Bankers need to make sure that they calculate FCFF on the cash flow statement for the past two historical years from which forecasted FCFF can be anchored ⚓.
Most analysts will never bother collating historical cash flow numbers but it remains key to ensure the accuracy of the base from which forecasted FCFF is computed.
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