How to Answer "Walk Me Through a DCF" (With a 60-Second Model Answer)

"Walk me through a DCF" is the question almost every investment banking candidate prepares for, and the one where most of them sound identical. That is the opportunity. The interviewer is not checking whether you have heard of a discounted cash flow model. They are checking whether you can explain one cleanly, in order, without notes, and then survive the next question.

Here is how to do both.

The answer has four steps. Say that first.

Open by naming the structure: "A DCF values a company based on the present value of its future cash flows. There are four steps." That one sentence tells the interviewer you know where you are going, which is half of what they are grading. (Why structure matters as much as content is the subject of Knowing the Answer Is Not the Same as Passing.)

Then walk the four steps.

1. Project unlevered free cash flow. Usually five to ten years. Start from EBIT, tax it, add back depreciation and amortisation, subtract capital expenditure and the increase in net working capital. "Unlevered" means the cash flow before any payments to lenders, so it belongs to everyone who funds the business.
2. Calculate a terminal value. You cannot project forever, so you capture everything after the forecast period in one number. Either the perpetuity growth method (final-year cash flow grown at a modest long-term rate, divided by the discount rate minus that growth rate) or the exit multiple method (final-year EBITDA times a multiple drawn from comparable companies).
3. Discount everything back at WACC. The weighted average cost of capital blends the cost of equity and the after-tax cost of debt, because unlevered cash flow goes to both groups. Discount each year's cash flow and the terminal value to today, then add them up. That sum is enterprise value.
4. Bridge to equity value. Subtract net debt (debt minus cash), plus preferred stock and non-controlling interests. Divide by diluted shares outstanding for an implied share price.

The 60-second model answer

Read this aloud with a timer. If it takes you longer than a minute, you are adding detail nobody asked for.

"A DCF values a company based on the present value of its future cash flows, in four steps. First, I project unlevered free cash flow for five to ten years: EBIT after tax, plus D&A, minus capex, minus the change in working capital. Second, I calculate a terminal value for everything beyond that, using either a perpetuity growth rate or an exit multiple. Third, I discount those cash flows and the terminal value back to today at the WACC, since unlevered cash flow belongs to both debt and equity holders. That gives enterprise value. Finally, I subtract net debt and other non-equity claims to get equity value, and divide by diluted shares for a value per share."

Then stop talking. Ending cleanly is part of the answer.

The five follow-ups that actually decide it

Nobody fails on the walkthrough itself. Candidates fail one question later, when the script runs out. These are the follow-ups to have ready.

"Why do you use WACC and not the cost of equity?" Because the cash flows are unlevered. They are available to lenders and shareholders alike, so the discount rate has to reflect the return both groups require. If you used levered free cash flow (after interest and debt repayments) you would discount at the cost of equity and land directly on equity value.

"Which part of the value is usually biggest?" For most companies, the terminal value is a large share of the total, often the majority. Say that, then add the insight: that is why the growth rate and exit multiple assumptions deserve the most scrutiny, and why bankers show a sensitivity table rather than a single number.

"What happens to the valuation if WACC goes up?" It goes down. A higher discount rate shrinks the present value of every future cash flow, and the effect is strongest on the distant ones, which means the terminal value takes the biggest hit.

"What growth rate would you use for the terminal value?" Something modest, generally at or below long-run economic growth. A company cannot grow faster than the economy forever, or it would eventually become the economy. If your perpetuity growth rate is higher than your discount rate, the formula breaks, and saying so shows you understand it rather than memorised it.

"Why subtract cash when you go from enterprise value to equity value?" You do not subtract cash. You subtract net debt, which is debt minus cash. Cash is added back because enterprise value reflects the operating business only, and shareholders also own the cash sitting on the balance sheet. Interviewers love this one because candidates who memorised "subtract net debt" without understanding it get tangled.

Where to sanity-check your numbers

If you want to ground your assumptions in real data rather than guesses, Aswath Damodaran at NYU Stern publishes free datasets that practitioners and students use constantly, including cost of capital by industry and historical growth rates. You will not quote them in an interview, but building one practice DCF with real inputs teaches you more than reading ten guides.

How to make it stick this week

1. Say the 60-second answer out loud three times a day until you can do it without looking. Recognising the answer and producing it are different skills.
2. Have someone ask you the five follow-ups in random order. The order matters less than whether you can switch cleanly between them.
3. Explain it to someone outside finance. If you can make a friend follow the four steps, the interviewer certainly will.

This question will come up in nearly every technical round you sit, and recruiting starts earlier than most people expect, as our verified recruiting timeline shows. More free material is in the Knowledge Base, and new pieces land in IBB Insights.