Walk Me Through a DCF: Interview Answer & Worked Example
How do you walk through a DCF in an interview?
Project unlevered free cash flow, discount it at WACC, add the present value of terminal value, then bridge enterprise value to equity value. Explain the assumptions that drive the result rather than reciting the steps alone.
Start with the operating business, then move to the investors who own claims on it. A DCF estimates value from future cash generation; it is sensitive to forecasts and discounting assumptions.
A natural spoken answer
“I would forecast the company’s unlevered free cash flow over an explicit period, estimate terminal value, and discount both at WACC to get enterprise value. I would then subtract debt and other non-equity claims, add excess cash and non-operating assets, and divide by diluted shares to estimate equity value per share. Finally, I would test the key assumptions.” This is a starting structure, not a script to memorize.
Connect the mechanics
UFCF = EBIT × (1 − tax rate) + depreciation and amortization − capital expenditures − increase in operating working capital. Forecasts should connect operating margins, reinvestment and growth. Interest is excluded because the cash-flow stream is before financing; WACC reflects the required return of debt and equity providers.
Work a small example
Assume year-end UFCF of $50 million in year one and $55 million in year two, 10% WACC and 3% perpetual growth after year two. Terminal value at the end of year two is 55 × 1.03 ÷ (0.10 − 0.03) = $809.29 million. Enterprise value is 50 ÷ 1.10 + 55 ÷ 1.10² + 809.29 ÷ 1.10² = $759.74 million. With $180 million debt and $20 million excess cash, equity value is $599.74 million. This deliberately short forecast is an arithmetic illustration, not a recommended forecast horizon.
What an interviewer might probe
Why must perpetual growth be below WACC? Why does terminal value use next-period cash flow? What if growth requires much more working capital? What changes when valuing equity cash flows directly? State timing and operating assumptions before answering.
Common errors
Do not discount an equity cash-flow stream at WACC or treat terminal value as present value. Keep year-end versus midyear timing consistent. A precise spreadsheet output does not make uncertain forecasts precise.
Put it into practice
Work through an original scenario, check the calculation and concept, then try fresh inputs.
Start this practice exercise →Related guides
- Unlevered Free Cash Flow Formula: Example & Interview Practice
- Enterprise Value vs Equity Value: Bridge, Example & Practice
Prepared by Accretive Thinking. Original fictional examples. Calculations checked; qualified expert review pending. Educational practice, not investment advice.