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

Q: What is unlevered free cash flow and why is it used in a DCF?

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.

Q: Why does terminal value represent 60-80% of a DCF output?

Terminal value captures all cash flows beyond the explicit 5-10 year forecast period. Since a company s value extends indefinitely past the projection window, and near-term cash flows are only a fraction of total lifetime value, terminal value naturally dominates. This makes growth rate and exit multiple assumptions the most consequential inputs in the entire model.

Q: What are the four steps to walk through a DCF in an interview?

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.

Q: Why do you add back depreciation in a DCF?

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.

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.

Michael Neal·2 min read·updated July 2026

"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

The Prompt

"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.

Standard Framework

"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."

U FCF = EB I T \times (1 - Tax Rate) + D & A - C a pE x - Δ N W C

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."

Follow-Up Traps

"Why add back Depreciation?"

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.

"Which Terminal Value method is better?"

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

"Why use WACC?"

Unlevered Free Cash Flow belongs to both debt and equity holders. WACC represents the blended required return, weighted by capital structure proportions.

Execution Notes

Memorize the four steps. Slow down deliberately when reciting the FCF formula—signals control.

Master Accretion/Dilution Analysis next.

Frequently Asked Questions

What is unlevered free cash flow and why is it used in a DCF?

Why does terminal value represent 60-80% of a DCF output?

What are the four steps to walk through a DCF in an interview?

Why do you add back depreciation in a DCF?