DCF Hardo Tech Practice Test 2025 – Complete Exam Prep Resource

The appropriate approach to value a company contracted for exactly 10 years of projects is to project revenue for the first 10 years and then determine terminal growth. This method involves estimating the expected cash flows or revenues generated by the company over the duration of the contract. Once the cash flows for the specific period are estimated, a terminal growth rate can be applied to project the value of the company beyond the contract term.

The rationale behind this approach is that it aligns with the nature of the contract, allowing for a detailed assessment of the company’s financial performance during the specific term. It considers the possibility that the company may experience varying growth rates or revenue fluctuations due to the terms of the projects. After the explicit forecast period, applying a terminal growth rate allows for a realistic estimation of the company’s ongoing value, assuming it continues operations.

In contrast, using historical profit margins may not accurately reflect future performance, especially if the company's circumstances or market conditions change. Assigning a flat growth rate over 10 years ignores the dynamics of a business environment where revenues can be influenced by a variety of factors. Discounting all cash flows to present value using WACC is an essential part of valuation, but it should be done after determining the cash flows, which makes this option