Guide
How to answer “Walk me through a DCF”
Updated November 1, 2026
Say it in five steps: project unlevered free cash flow for five to ten years; choose a discount rate, usually the WACC; calculate a terminal value with an exit multiple or the Gordon growth method; discount everything to today and add it up to get enterprise value; then bridge to equity value and a value per share. Aim for 90 seconds to 2 minutes.
What's a good answer to “Walk me through a DCF”?
Five steps, in about 90 seconds to 2 minutes, said like this:
Example“A DCF values a company at the present value of its future cash flows, in five steps. First, I project the company's unlevered free cash flow for five to ten years: EBIT times one minus the tax rate, plus D&A, minus CapEx, minus the increase in net working capital. Second, I calculate a discount rate, usually the weighted average cost of capital, because unlevered cash flow belongs to both debt and equity holders. Third, I calculate a terminal value for the years after the projection, either by applying an exit multiple to final-year EBITDA or with the Gordon growth method. Fourth, I discount the cash flows and the terminal value back to today and add them up, which gives enterprise value. Finally, to get to equity value, I subtract debt, preferred stock and noncontrolling interest and add cash, then divide by diluted shares for a value per share.”
That's about 150 words, or roughly 70 seconds at 130 words a minute. Superday Room's target for this question is 120 seconds, which leaves room for one refinement, such as how you chose the growth rate.
What are the five steps of a DCF?
Project cash flow, choose a discount rate, calculate a terminal value, discount to present value, then bridge to equity value. With the formulas:
- Unlevered free cash flow = EBIT × (1 – tax rate) + D&A – CapEx – increase in net working capital. It excludes interest because it belongs to all capital providers. From EBITDA to UFCF →
- Discount rate. The WACC, with the cost of equity from the CAPM and the after-tax cost of debt. How to calculate WACC →
- Terminal value. Exit multiple: final-year EBITDA × EV/EBITDA. Gordon growth: final-year FCF × (1 + g) ÷ (WACC – g). Which method is better? →
- Present value. Each cash flow ÷ (1 + WACC)year, and the terminal value discounted from the final year. The sum is enterprise value.
- Equity value. Enterprise value – debt – preferred stock – noncontrolling interest + cash; divide by diluted shares. The bridge, explained →
What does a DCF look like with numbers?
Unlevered free cash flow of $100 million next year, growing $10 million a year; a WACC of 10%; 3% growth after year five.
| $ millions | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|---|
| Unlevered FCF | 100.0 | 110.0 | 120.0 | 130.0 | 140.0 |
| Discount factor at 10% | 0.909 | 0.826 | 0.751 | 0.683 | 0.621 |
| Present value | 90.9 | 90.9 | 90.2 | 88.8 | 86.9 |
- Present value of the five years: $447.7 million.
- Terminal value: 140 × 1.03 ÷ (10% – 3%) = $2,060.0 million, worth $1,279.1 million today (× 0.621).
- Enterprise value: 447.7 + 1,279.1 = $1,726.8 million. The terminal value is 74% of it, which is why interviewers probe that assumption.
- Equity value: with $400 million of debt and $100 million of cash, 1,726.8 – 400 + 100 = $1,426.8 million; over 100 million diluted shares, $14.27 a share.
What follow-ups should you expect?
Questions on why you use unlevered cash flow and the WACC, the terminal growth rate, and what moves the value:
- Why unlevered free cash flow and the WACC?
- Unlevered cash flow is available to debt and equity holders, so it's discounted at the blended cost of both and gives enterprise value. Levered free cash flow belongs only to shareholders, so it's discounted at the cost of equity and gives equity value directly.
- What's a reasonable terminal growth rate?
- One below the discount rate, or the formula breaks, and no higher than the long-run growth of the economy the company operates in, per NYU's Aswath Damodaran (The Stable Growth Rate).
- What happens to the value if the WACC rises?
- It falls: every future cash flow and the terminal value are worth less today. Short answer →
- Why is the terminal value so large?
- It captures every year after the projection period. In the example above it's 74% of enterprise value.
What mistakes cost points?
Mostly mismatches: the wrong discount rate for the cash flow, a terminal value formula error, or the bridge signs flipped.
- Discounting unlevered free cash flow at the cost of equity. It goes with the WACC and gives enterprise value.
- Dividing the terminal value by the growth rate alone instead of (discount rate – growth).
- Adding up the cash flows and calling the total equity value.
- Forgetting to discount the terminal value back to today.
- Getting the bridge signs backwards: you subtract debt and add cash going from enterprise value to equity value.
- Running well past two minutes. Interviewers want the structure, not every refinement.
Frequently asked questions
- How long should my answer to “Walk me through a DCF” be?
- About 90 seconds to 2 minutes. Superday Room's target for this question is 120 seconds.
- What discount rate do you use in a DCF?
- The weighted average cost of capital (WACC) when you discount unlevered free cash flow. Use the cost of equity if you discount levered free cash flow.
- How do you calculate terminal value?
- Either apply an exit multiple, such as EV/EBITDA, to final-year EBITDA, or use the Gordon growth method: final-year free cash flow × (1 + g) ÷ (discount rate – g).
- How do you get from enterprise value to equity value?
- Subtract debt, preferred stock and noncontrolling interest, and add cash. Divide by diluted shares for a value per share.
Sources
- Aswath Damodaran, NYU Stern, “The Stable Growth Rate”, checked October 29, 2026.