Walk Me Through a DCF
This question appears in 95%+ of investment banking interviews. It's the first technical question you'll face, and the one that sets the tone for the entire interview. Here's the framework that earns "strong hire" ratings.
Why Every Interviewer Asks This
"Walk me through a DCF" isn't just another technical question, it's a litmus test. Your answer tells the interviewer everything they need to know about your technical depth in under two minutes.
- Tests intrinsic valuation understanding: Do you actually know how to value a company from first principles, or are you just reciting steps?
- Reveals structured thinking: Can you walk through a complex process in a logical sequence without getting lost or jumping around?
- Surfaces core finance concepts: Time value of money, WACC, terminal value, FCF, one question touches everything that matters.
- Separates memorizers from thinkers: The follow-up questions are where most candidates fall apart. Understanding beats memorization every time.
Key insight: The interviewers aren't testing if you can recite steps. They're testing if you understand why each step matters and can handle follow-ups that go deeper.
The Complete 6-Step DCF Framework
This is the structure top candidates use. Each step builds on the last, learn it once, and you'll never stumble on this question again.
Project Free Cash Flows
Start with revenue, build down through EBITDA, then to unlevered free cash flow: EBIT × (1 − tax rate) + D&A − CapEx − changes in NWC. Typical projection period is 5-10 years depending on business visibility.
Calculate WACC
Weighted average of cost of equity (CAPM: risk-free rate + beta × equity risk premium) and after-tax cost of debt, weighted by the company's target capital structure. This is your discount rate.
Discount Cash Flows to Present Value
Apply WACC to each projected year's free cash flow to bring them back to today's dollars. This gives you the present value of the explicit forecast period.
Calculate Terminal Value
Two methods: Gordon Growth Model, FCF × (1 + g) / (WACC − g), or Exit Multiple (terminal year EBITDA × multiple). Most bankers use both and compare the implied values.
Discount Terminal Value to Present
Bring the terminal value back to present using the same WACC. Terminal value typically represents 60-80% of total enterprise value, that's why this step matters so much.
Sum to Enterprise Value
Add PV of projected FCFs + PV of terminal value = Enterprise Value. To bridge to equity value: subtract net debt, add excess cash, and adjust for non-operating assets.
The 12 Follow-Up Questions They Always Ask
Nailing the initial walkthrough is only half the battle. Here are 6 of the 12 follow-ups you should expect, each one designed to probe whether you truly understand the mechanics.
"What discount rate do you use and why?"
"How do you calculate unlevered free cash flow?"
"What growth rate do you use for terminal value?"
"Why might you use exit multiple vs. perpetuity growth?"
"What happens to DCF value when you increase WACC by 1%?"
"When would a DCF give you the highest vs. lowest value?"
The full guide covers all 12 follow-up questions with detailed answers and the common mistakes that get you dinged.
See all 12 in the guide7 Mistakes That Kill Your DCF Answer
Interviewers hear dozens of DCF walkthroughs every recruiting cycle. These are the red flags that instantly downgrade a candidate.
Jumping straight into steps without explaining what a DCF actually does, valuing a company based on the present value of its future cash flows
Saying "discount by WACC" without explaining what WACC represents or how it's calculated
Using levered free cash flow instead of unlevered free cash flow in an enterprise-value DCF
Forgetting to subtract CapEx or changes in net working capital when calculating FCF
Not knowing the difference between Gordon Growth and exit multiple terminal value methods
Being unable to explain what drives terminal value sensitivity (growth rate, WACC, exit multiple)
Failing to bridge from enterprise value to equity value, the interview isn't done until you do
Master All Technical Questions, Not Just DCF
The Finance Technical Interview Guide covers every question you'll face across accounting, valuation, M&A, LBO, and more.
Finance Technical Interview Guide
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Don't Walk Into Your Interview Unprepared
The DCF question is just the beginning. The full guide covers 300+ questions across every technical topic, with frequency tags, worked examples, and the exact mistakes to avoid.
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