How to Walk Through a DCF in an Interview

"Walk me through a DCF." It's asked in virtually every investment banking, PE, and corporate development interview — and it's not really a modeling question. Interviewers want to hear whether you understand the logic of intrinsic valuation: what you're calculating, why each step exists, and which assumptions actually matter. This guide gives you a structured verbal framework you can deliver in 2–3 minutes, plus the follow-up answers that separate strong candidates from memorized ones.

The 60-second version

"A DCF values a company based on the present value of its future free cash flows. I forecast unlevered free cash flow for 5–10 years, discount those at WACC, calculate a terminal value for cash flows beyond the forecast period, sum everything to get enterprise value, subtract net debt, and divide by shares to get an implied price. The most sensitive inputs are WACC and terminal value assumptions, so I always present a sensitivity range, not a single number."

That's the skeleton. Expand each section when the interviewer asks follow-ups.

Step-by-step walkthrough (2–3 minutes)

Step 1: Project unlevered free cash flow

"I start by forecasting the company's revenue, margins, and cash flow items to calculate unlevered free cash flow for each year of the explicit forecast period — typically 5 to 10 years."

UFCF = EBIT × (1 − Tax Rate) + D&A − Capex − ΔNWC

"I use EBIT rather than EBITDA because I need to tax-effect operating income properly. I add back D&A since it's non-cash, subtract capex and the change in working capital since those are real cash outflows. The result is cash available to all capital providers — debt and equity — before any financing decisions."

If asked why unlevered: "Because I'm discounting at WACC, which is the blended cost of all capital. Using levered FCF with WACC would double-count the capital structure effect."

Step 2: Calculate WACC

"I discount the projected cash flows at WACC — the weighted average cost of capital."

WACC = (E/V × Cost of Equity) + (D/V × Cost of Debt × (1 − Tax Rate))

"Cost of equity comes from CAPM: risk-free rate plus beta times the equity risk premium. Cost of debt is the company's borrowing rate, tax-effected. Weights are based on market values of equity and debt, not book values."

State your assumptions: "For this company, I'd assume a 4.25% risk-free rate, 1.1 beta, 5% equity risk premium → 9.75% cost of equity. With 5.5% pre-tax cost of debt at 25% tax and a 75/25 equity-debt split, WACC comes to about 8.5%."

Step 3: Calculate terminal value

"The explicit forecast only covers 5–10 years, but the company continues beyond that. Terminal value captures all remaining cash flows."

Two methods — state both:

Gordon Growth:

TV = Final Year UFCF × (1 + g) ÷ (WACC − g)

"g should be conservative — 2% to 3%, near long-run GDP growth."

Exit Multiple:

TV = Final Year EBITDA × Exit EV/EBITDA Multiple

"Based on current trading comps for the peer group."

"I calculate both and cross-check. If Gordon Growth implies a 15x exit multiple but comps trade at 10x, one of the assumptions is unrealistic."

Step 4: Discount to present value

"I discount each year's UFCF and the terminal value back to today at WACC."

PV = Cash Flow ÷ (1 + WACC)^n
Enterprise Value = Σ PV of explicit UFCF + PV of Terminal Value

"Optionally, I use the mid-year convention — discounting from the midpoint of each period rather than the end — which modestly increases present value since cash flows arrive throughout the year, not all on December 31."

Step 5: Bridge to share price

"From enterprise value, I subtract net debt to get equity value, then divide by diluted shares outstanding."

Equity Value = EV − Net Debt
Implied Price = Equity Value ÷ Diluted Shares

"Net debt is total debt minus cash. I use fully diluted shares — basic shares plus in-the-money options using the treasury stock method."

Step 6: Present as a range

"I never present a single DCF value. I show a sensitivity table across WACC and terminal growth or exit multiple, and present the range on a football field alongside comps and precedent transactions."

Follow-up questions and answers

"What are the most sensitive inputs?" "WACC and terminal value — by far. WACC compounds through every discounted cash flow, and terminal value typically represents 60%–80% of total enterprise value. A 1% change in WACC can move the valuation by 10%–20%."

"Why might DCF differ from comps?" "DCF is intrinsic — based on the company's own projected cash flows. Comps reflect what the market pays for similar companies today. They diverge when growth assumptions differ, when the company has unique characteristics not captured by peers, or when market sentiment differs from fundamentals."

"What is the mid-year convention?" "Standard discounting assumes cash flows arrive at year-end. Mid-year convention assumes they arrive at the midpoint — discounting from 0.5, 1.5, 2.5 years instead of 1, 2, 3. More accurate since companies generate cash throughout the year."

"How do you choose the forecast period?" "Long enough for the company to reach a steady state — typically 5–10 years. For high-growth companies, you need a longer explicit period before terminal value, because the terminal value assumption matters less when more value is in the explicit forecast."

"What if the company is unprofitable?" "DCF still works but requires forecasting the path to profitability. Revenue multiples or comps may be more reliable for early-stage companies. If using DCF, extend the explicit forecast until the company generates positive UFCF, then apply terminal value."

"How do you handle cyclical companies?" "Normalize earnings — use mid-cycle EBITDA rather than peak or trough. Apply a normalized UFCF for the explicit period and a normalized terminal value. DCF on peak earnings overstates value; DCF on trough earnings understates it."

Common mistakes to avoid in the verbal walkthrough

• Skipping the "why unlevered" explanation — always connect UFCF to WACC
• Presenting a single point estimate — always mention sensitivity/range
• Using book values for WACC weights — state market values explicitly
• Ignoring terminal value cross-check — mention you verify Gordon Growth against exit multiples
• Forgetting diluted shares — always say "fully diluted" when bridging to per-share price
• Not stating assumptions — "I'd use a 4.25% risk-free rate" is better than "I'd use CAPM"

The 3-minute delivery template

Practice this until it's automatic:

1. "I forecast unlevered free cash flow for 5–10 years." (10 seconds)
2. "UFCF = EBIT × (1 − T) + D&A − Capex − ΔNWC." (10 seconds)
3. "I discount at WACC — cost of equity via CAPM, after-tax cost of debt, market-value weights." (15 seconds)
4. "Terminal value via Gordon Growth and exit multiple — I cross-check both." (10 seconds)
5. "Sum PV of explicit flows and terminal value for enterprise value." (5 seconds)
6. "Subtract net debt, divide by diluted shares for implied price." (5 seconds)
7. "Most sensitive to WACC and terminal value — I present a range, not a point estimate." (10 seconds)

Total: ~65 seconds for the core walkthrough. Expand on any step when asked.

The takeaway

Walking through a DCF in an interview is a communication test, not a calculation test. The interviewer wants structured thinking: what you're doing at each step, why you're doing it, and which assumptions matter most. Deliver the framework confidently, state your assumptions explicitly, and always end with sensitivity and range — never a false-precision single number.