Valuation · Intrinsic Valuation
FCFF vs FCFE Discount Rate
This question tests how to match the right discount rate to the type of free cash flow in a DCF valuation.
Interview question
- Difficulty
- Easy
- Topic
- Valuation
- Subtopic
- Intrinsic Valuation
What this question trains
This problem practices a core valuation concept in investment banking interviews, the link between cash flow definition and discount rate. Candidates need to understand who receives each type of cash flow, how unlevered and levered cash flows differ, and why the discount rate must correspond to the capital providers entitled to those cash flows. Interviewers ask this because a DCF only works if the numerator and denominator are consistent, and mistakes here can lead to incorrect enterprise value or equity value conclusions.