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Read the setup, work the steps, then say the answer cleanly.
01
First RoundDCF & WACC
Separate the two WACC effects
Which has a bigger effect on valuation: a 1% change in the perpetuity growth rate or a 1% change in WACC?
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Reveal the worked answer
Both move the terminal-value spread. WACC also changes discount factors; growth changes the terminal cash flow. Compare the full DCF.
Terminal value
In the Gordon growth formula, TV = FCF × (1 + g) / (WACC - g). A one-percentage-point move in either WACC or g changes the spread by the same absolute amount when moved in opposite directions. Growth also changes the (1 + g) term.
Discounting
WACC discounts each forecast cash flow and the terminal value. Growth does not change those discount factors, but it changes the terminal cash flow and value.
Conclusion
There is no fixed winner. WACC also changes how you discount the forecast, but growth changes the terminal cash flow as well as the WACC - g spread in this formula. Ask for the base rates, forecast period, cash-flow mix, and direction of the change; run both sensitivities before choosing.
Interview check: mention the terminal spread, terminal cash flow, and present-value discounting. Compare sensitivities instead of memorizing a winner.
A small DCF check
This is my illustrative calculation, not another interview prompt. Assume $100 of unlevered cash flow at each year-end for five years. Year six grows from year five. Base WACC is 10% and terminal growth is 3%.
EV = sum of $100 / (1 + WACC)t for years 1-5, plus [$100 × (1 + g) / (WACC - g)] / (1 + WACC)5.
Base case10% WACC, 3% growth$1,292.72
WACC down 1 point9% WACC, 3% growth$1,504.68
+16.40% vs. base
Growth up 1 point10% WACC, 4% growth$1,455.34
+12.58% vs. base
WACC has the larger effect in this setup. That result belongs to these cash flows and rates, not every DCF. Change one input at a time and keep the rest fixed. A one-percentage-point change from 10% to 9% is not a 1% relative change.
$10 of depreciation with a 40% tax rate - walk through the three statements.
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Assume the $10 is an extra book and tax depreciation expense, with a 40% cash tax benefit available now. There is no new capex or other change in this walk.
Income statementEBIT -$10; taxes -$4NI -$6
Cash flow statementNI -$6 + D&A $10Cash +$4
Balance sheetCash +$4; PP&E -$10Assets -$6
Balance: retained earnings falls by $6, matching the $6 net decline in assets.
$45 of free cash flow with a 12.5% discount rate - how much would you pay for it?
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Reveal the worked answer
The answer changes completely depending on whether $45 is a one-time cash flow or a perpetuity.
Perpetuity$45 / 12.5%$360 present value
One year only$45 / 1.125$40 present value
Best response: ask whether the cash flow repeats, grows, and when it is received before calculating.
More questions
Two more prompts stay closed until you commit to an answer. Round labels come from the workbook source, not a fixed interview script.
First RoundDCF & WACC
1. Rank from highest to lowest beta: S&P 500, a utilities company, a tech startup, a single dollar bill.
Check the worked answer
The usual interview ordering is tech startup, S&P 500, utilities company, then a dollar bill. Treat the company rankings as assumptions, not measured betas. The S&P 500 has beta 1 when it is the benchmark; a fixed nominal dollar has no market-return sensitivity. Beta measures co-movement with the chosen market, not total volatility. A risky startup is not guaranteed to have a high beta, so I would explain the business risk rather than invent a precise number.
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