The standard answer to "Walk me through a DCF" that works for every bank. We strip away the theory and give you the interview script.
Discount projected free cash flow and a terminal value to an enterprise value.
"The value of any stock, bond, or business today is determined by the cash inflows and outflows, discounted at an appropriate rate, that can be expected to occur during the remaining life of the asset." (Warren Buffett)
"Walk me through a DCF" is the most common technical question in existence. Stumble here, and you're done.
Deliver a 60-second, punchy answer.
"A DCF values a company based on the Present Value of its Cash Flows and the Present Value of its Terminal Value."
Step 1: Project Free Cash Flow
"Project financials for 5-10 years using assumptions for revenue growth, margins, and working capital. Calculate Unlevered Free Cash Flow for each year."
Step 2: Calculate Terminal Value
"Calculate Terminal Value to capture cash flows beyond the projection period using either the Multiples Method (exit multiple on final year EBITDA) or the Gordon Growth Method (perpetual growth rate on final cash flow)."
Step 3: Discount to Present Value
"Discount forecast period cash flows and Terminal Value to present using WACC."
Step 4: Enterprise Value to Equity Value
"Sum present values to get Enterprise Value. Subtract Net Debt and Minority Interest to arrive at Equity Value. Divide by diluted share count for intrinsic share price."
Non-cash expense. CapEx already captures the cash outflow; depreciation is an accounting charge that reduced taxes. Add it back to reflect true cash generation.
| Method | Usage | Rationale |
|---|---|---|
| Multiples | 95% of banking | Market-based; reflects current trading/transaction comps |
| Gordon Growth | Academic/utilities | Requires stable, predictable cash flows; rarely has good comps |
Unlevered Free Cash Flow belongs to both debt and equity holders. WACC represents the blended required return, weighted by capital structure proportions.
The number one way candidates blow this walkthrough: being overly detailed and talking too much. Give the high-level explanation, then let the interviewer drag you into details as needed.
Memorize the four steps. Slow down deliberately when reciting the FCF formula: it signals control.
Master Accretion/Dilution Analysis next.