How do you answer "walk me through a DCF" in 60 seconds?

Unlevered free cash flow (UFCF) equals EBIT times (1 minus tax rate) plus D&A minus CapEx minus changes in net working capital. It represents cash available to all capital providers before financing decisions. DCF uses UFCF because it pairs with WACC, which blends the cost of debt and equity, producing a capital-structure-neutral enterprise value.

Terminal value captures the cash flows beyond the explicit 5-10 year projection period. You calculate it with either the Multiples Method, applying an exit multiple to final year EBITDA, or the Gordon Growth Method, applying a perpetual growth rate to the final year's cash flow. In banking, the Multiples Method is used about 95% of the time because it is market-based and reflects current trading and transaction comps, while Gordon Growth suits stable, predictable businesses like utilities.

Step 1: Project unlevered free cash flow for 5-10 years using revenue growth, margin, and working capital assumptions. Step 2: Calculate terminal value using either the Gordon Growth Method or an exit multiple. Step 3: Discount all cash flows and terminal value back to present using WACC. Step 4: Sum to get enterprise value, subtract net debt and minority interest, divide by diluted shares for implied share price.

Depreciation is a non-cash charge that reduces reported earnings but does not represent an actual cash outflow in the current period. Since DCF values a company based on actual cash generation, you add back depreciation to reverse the accounting deduction. The real cash impact of asset purchases is already captured separately through capital expenditures.