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Interview Question for Summer Associate at Merrill Lynch: |
Apr 7, 2009 |
| Tags: | dcf, technical investment banking See more , See less 8 |
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by Mike:
DCF's...Take the set of cash flows expected in the future and discount them back to present value using the discount rate (also known as interest rate).
i.e. you buy a computer that will increase your company's profits by 5000 at the end of the year. How much money is your computer purchase generating in today's terms? This is present value. Thus, discount the Future value of 5000 to todays terms. How? Lets say the interest rate is 8%. in this case, 5000/1.08 = PV
Of course this is a very very basic PV analysis for 1 year using a single CF. You will need to learn present value of annuity concepts (consistent cash flows or unequal cash flows) as well as Present value of growing annuity (cashflows increase at set intervals...i.e. your computer will generate 5,000 in cash next year, 20,000 the year after that, etc.) concepts.
If you have an MBA, you should probably have covered this in finance classes.