Walk me through a DCF from start to finish in under two minutes.

A DCF values a company as the present value of its future unlevered free cash flows discounted at WACC. I do it in six steps.

1. I project unlevered free cash flow for an explicit forecast period, typically five to ten years, until the business reaches a mature steady state. Unlevered free cash flow equals EBIT times one minus the tax rate, plus depreciation and amortization, minus capital expenditures, minus the increase in net working capital.
2. I estimate the terminal value for all cash flows beyond that explicit period, either with the Gordon growth method, growing the final-year cash flow at a perpetuity rate below long-run GDP, or by applying an exit multiple to terminal-year EBITDA.
3. I compute the discount rate as WACC, the weighted average cost of capital, which blends the required returns of all capital providers because unlevered cash flow belongs to both debt and equity holders.
4. I discount each year’s projected free cash flow and the terminal value back to today at WACC. The sum gives enterprise value.
5. I bridge to equity value by subtracting net debt and any other debt-like claims such as preferred stock.
6. I divide by fully diluted shares outstanding to get an implied share price and compare it with the market price to judge over- or undervaluation. Because the terminal value typically contributes 60 to 80 percent of enterprise value, I always sensitize WACC and terminal growth and present the result as a range.

What the interviewer is actually testing

"Walk me through a DCF" is the single most common technical question in IB interviews, and at elite boutiques it is almost never the end: it is the opening of a 10-minute escalation. The interviewer is testing three things.

First, structure under pressure. Can you deliver the six steps in order, crisply, in under 90 seconds, without rambling into sub-details before the skeleton is up? A strong candidate signposts: "A DCF values a company as the present value of its future free cash flows. There are two pieces: an explicit forecast period and a terminal value…", then fills in each piece. Weak candidates dive into CAPM formulas before establishing what's being discounted and why.

Second, the consistency principle. The most reliable follow-up is some version of "why unlevered free cash flow?" or "why discount at WACC?" They want to hear that the cash flow and the discount rate must match the same investor group: UFCF belongs to all capital providers, WACC is their blended required return, and the output is enterprise value. Candidates who can articulate why the pairing matters, not just that it exists, immediately separate themselves.

Third, judgment about the tool itself. Expect "what are the weaknesses of a DCF?", "when would you not use one?", or "your DCF says $80 and the stock trades at $50: what do you do?" Strong answers show you understand the DCF is assumption-driven, terminal-value-heavy, and one input into a valuation triangulation, while still defending why it's analytically valuable.

Signal mastery by quantifying as you go: mention that terminal value is typically 60–80% of enterprise value, that forecast periods run until steady state, and that you'd present output as a sensitivity range rather than a point estimate. Precision of language ("enterprise value," not "the value"; "fully diluted shares," not "shares") is exactly what elite-boutique interviewers are listening for.

Common traps

Trap 1: Mismatching cash flows and discount rate. Candidates say "project free cash flows and discount at WACC" without specifying unlevered, or worse, describe subtracting interest expense and then discounting at WACC. The pairing is the whole test: unlevered FCF ↔ WACC ↔ enterprise value; levered FCF ↔ cost of equity ↔ equity value.

Say it out loud: "I project unlevered free cash flow (cash available to all capital providers, before interest), so I discount at WACC, the blended required return of debt and equity holders, and the sum gives me enterprise value."

Trap 2: Stopping at enterprise value. Many candidates end the walkthrough with "…and that gives you the value of the company." The DCF output is enterprise value; if the question is about a share price or equity value, you must bridge: subtract net debt, preferred, and minority interest, then divide by fully diluted shares.

Say it out loud: "Discounting the cash flows and terminal value gives me enterprise value. To get to an implied share price, I subtract net debt and other debt-like claims to reach equity value, then divide by fully diluted shares outstanding."

Trap 3: Forgetting terminal value, or hand-waving it. Some candidates describe only the 5-year projection. Others mention TV but can't name the two methods. Since TV is usually the majority of value, this is disqualifying.

Say it out loud: "Beyond the explicit forecast, I capture remaining value with a terminal value: either Gordon growth, growing the final-year cash flow at a perpetuity rate below long-run GDP, or an exit multiple on terminal-year EBITDA, and I cross-check one method against the other."

Trap 4: Presenting the DCF as precise. Saying "the DCF tells you what the company is worth" invites the follow-up "so why does anyone use comps?" The DCF produces a range driven by assumptions, and terminal value dominance means small input changes move the answer a lot.

Say it out loud: "A DCF gives an intrinsic value range, not a point estimate: I'd sensitize WACC and terminal growth and present it alongside comps and precedents, since 60–80% of the value typically sits in the terminal value."

Trap 5: Claiming a DCF works for any company. Applying a standard unlevered DCF to a bank or a pre-revenue startup signals memorization without judgment. Banks need dividend discount or levered approaches; startups put nearly all value in a speculative terminal value.

Say it out loud: "A DCF is most reliable for companies with stable, predictable free cash flow. For banks I'd use a dividend discount model since leverage is operational, and for early-stage companies with negative cash flow I'd lean on other methods because nearly all DCF value would sit in the terminal value."

Trap 6: Confusing "intrinsic" with "market-independent inputs." Candidates say the DCF "doesn't rely on the market at all." The framework is intrinsic, but key inputs (beta, the risk-free rate, the equity risk premium, sometimes the exit multiple) come straight from market data.

Say it out loud: "The DCF is intrinsic in structure, but it isn't fully market-independent: the discount rate is built from market inputs like beta and the risk-free rate, and an exit-multiple terminal value imports market pricing directly."