BIWS Discounted Cash Flow (DCF) Practice Test 2025 – 400 Free Practice Questions to Pass the Exam

Using excessive reliance on the present value of terminal value in a Discounted Cash Flow (DCF) analysis can signal that your assumptions might be flawed. This aspect is crucial because the terminal value often accounts for a significant portion of the total enterprise value in many DCF models, sometimes even exceeding 50%. If your DCF model heavily leans on the terminal value, it could suggest that your cash flow projections for the explicit forecast period may be overly optimistic or not reflective of the business's actual performance.

A healthy DCF model ideally balances both the cash flows from the forecast period and the terminal value. If the majority of the valuation is derived from the terminal value, this could mean that the cash flows during the explicit forecast phase are not sufficiently robust or realistic, resulting in an inflated value. Hence, reviewing your assumptions regarding growth rates, discount rates, and overall cash flow consistency is essential if terminal value plays an outsized role in the evaluation.

The other options, while they may point to different dynamics in the DCF analysis, do not necessarily indicate incorrect assumptions in the same manner. For instance, a terminal growth rate that is too low might simply suggest conservative growth estimates rather than incorrect assumptions. High company growth projections may reflect optimistic expectations rather than being