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.
WORK THROUGH THE DECISION
Run a DCF assumption audit before buying more prep
A DCF answer is only as coherent as its assumptions. Before adding more questions to your study list, test whether the cash flow, discount rate and terminal value describe the same business and claimholders.
Audit a fictional mini-model
Assume after-tax operating profit of 30, depreciation of 5, capital expenditure of 8 and a working-capital change of −2. Unlevered free cash flow is 30 + 5 − 8 − (−2) = 29.
| Check | Question to ask | Failure it catches |
|---|---|---|
| Cash-flow definition | Did I deduct interest in an unlevered model? | Mixing financing and operating cash flows |
| Working capital | Did I use the change or the ending balance? | Treating a balance as a period cash flow |
| Taxes | Did I count a timing benefit twice? | Inflating free cash flow |
| Terminal value | Are growth and reinvestment consistent? | Extending temporary benefits forever |
| Timing | Did I discount to the same valuation date? | Comparing unmatched values |
The cash-tax bridge shows how two correct methods reach the same free cash flow. The working-capital example shows why a negative balance can still consume cash when it becomes less negative.
Turn a sensitivity into an explanation
Do not stop at “higher WACC lowers value.” Explain whether a change reflects risk, capital structure or a different cash-flow definition. For terminal value, compute the implied exit multiple and identify what would make it plausible. A familiar multiple does not validate a poorly constructed forecast.
Decide what to study next
If the definition is unclear, return to the valuation-methods guide. If you understand the setup but lose the thread under changed assumptions, structured worked questions may help. If the gap is company research, a generic interview PDF will not supply the missing operating evidence.
Damodaran’s valuation questions are a primary reference for the underlying concepts. The existing URL is retained to preserve its intent; the mechanics are not rules that change merely because the page slug includes a year.
Choose support only for the gap you found
Useful for: Candidates who need to connect cash-flow definitions, taxes, working capital and terminal value.
Limit: Interview examples simplify real valuation; the guide is not investment or tax advice.
89-page technical guide with 306 numbered questions, worked explanations and six linked diagnostic drills.
Current price: $79. Review the contents and sample before purchase. This is the existing edition described on the product page, not a new 2028 edition.
Inspect the Finance Technical Interview Guide sample →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 can drive much of a DCF result. Check its contribution and test the terminal assumptions explicitly.
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. 306 numbered questions, plus worked practice problems and diagnostic drills.