DCF Interview Questions
"Walk me through a DCF" appears in nearly every IB interview. Here's the 6-step framework, the follow-up questions, and the common traps, tagged by how often they're actually asked.
The 6-Step DCF Framework
Project Unlevered Free Cash Flow
EBIT(1-T) + D&A - CapEx - ΔNWC for 5-10 years
Calculate Terminal Value
Perpetuity growth or exit multiple method
Discount to Present Value
PV = CF / (1 + WACC)^n for each year
Sum to Get Enterprise Value
PV of projected FCFs + PV of terminal value
Bridge to Equity Value
EV - Net Debt = Equity Value
Calculate Implied Share Price
Equity Value / Diluted Shares Outstanding
Red Flag Warning
Never use levered free cash flow (after interest) with WACC. If you use LFCF, discount at cost of equity. Mixing them is a common mistake that instantly signals weak understanding.
DCF Questions by Interview Frequency
Walk me through a DCF.
Project UFCF for 5-10 years, calculate terminal value, discount everything at WACC to get enterprise value, subtract net debt for equity value, divide by diluted shares.
The 30-second version gets a checkmark. The follow-ups determine the offer.
How do you calculate unlevered free cash flow?
UFCF = EBIT × (1 - Tax Rate) + D&A - CapEx - Change in Net Working Capital.
Unlevered because it's available to ALL capital providers. If using levered FCF, discount at cost of equity, not WACC.
What are the two methods for terminal value?
Perpetuity growth method: UFCF × (1+g) / (WACC-g). Exit multiple method: Final year EBITDA × exit EV/EBITDA multiple.
Terminal value often represents 60-80% of total DCF value. Always run sensitivities on terminal assumptions.
How do you calculate WACC?
WACC = (E/V × Re) + (D/V × Rd × (1-T)). Cost of equity from CAPM: Re = Rf + β × (Rm - Rf).
Use market values for weights, not book values. The (1-T) reflects the tax shield on debt.
What's the terminal growth rate?
Typically 2-3%, in line with long-term GDP growth or inflation. Should never exceed the economy's long-term growth rate.
If g > WACC, the formula breaks (negative denominator). A growth rate above GDP implies the company eventually becomes larger than the entire economy.
Does a DCF give you enterprise value or equity value?
Enterprise value. You discount UNLEVERED free cash flow at WACC, which represents all capital providers. Subtract net debt to get equity value.
Common trick question. If you used levered FCF discounted at cost of equity, you'd get equity value directly.
What are the limitations of a DCF?
Highly sensitive to assumptions, terminal value dominance, less useful for early-stage companies, and projection uncertainty beyond 2-3 years.
Strong candidates also mention the sensitivity check: back into the implied terminal multiple to verify reasonableness.
When would you NOT use a DCF?
Early-stage companies with no cash flows, financial institutions (use DDM instead), and cyclical companies where a single projection path is misleading.
Banks and insurance companies have different cash flow definitions, the traditional DCF framework doesn't map cleanly.
DCF Is Just One Chapter
The full Finance Technical Interview Guide covers 8 chapters: Accounting, EV/Equity Value, DCF, Comps, M&A, LBOs, Advanced Valuation, and Complex Accounting. 300+ questions tagged by frequency. 80+ pages.