Interview questions
DCF interview questions
A discounted cash flow (DCF) analysis values a company at the present value of the cash it will generate. Interview questions cover the steps (projecting unlevered free cash flow, discounting at the WACC, terminal value and the bridge to equity value) and the judgment calls behind each one.
Which DCF questions should you know?
The 3 below are free in Superday Room, each with a short answer, the mistake to avoid and a target time out loud.
Walk me through a DCF.
A DCF values a company at the present value of its future cash flows. 1. Project unlevered free cash flow for five to ten years: EBIT × (1 – tax rate) + D&A – CapEx – the increase in net working capital. 2. Choose a discount rate, usually the WACC. 3. Calculate a terminal value with an exit multiple or the Gordon growth method. 4. Discount the cash flows and the terminal value to today and add them up to get enterprise value. 5. To get a value per share, subtract debt, preferred stock and noncontrolling interest, add cash, and divide by diluted shares.
Common mistake: Discounting unlevered free cash flow at the cost of equity. Unlevered cash flow is discounted at the WACC and gives enterprise value.
Likely follow-up: Why do you use unlevered rather than levered free cash flow?
Full guide: how to answer “Walk me through a DCF”, with a worked example
How do you calculate Terminal Value, and which method is better?
Two methods. The multiples method applies an exit multiple, such as EV/EBITDA, to final-year EBITDA. The Gordon growth method grows the final-year free cash flow at a constant rate forever: terminal value = FCF × (1 + g) ÷ (discount rate – g). Neither is strictly better. Bankers often lean on multiples because they tie to market data, while Gordon growth is more theoretical; use each to cross-check the other, for example by backing out the growth rate your exit multiple implies.
Common mistake: Dividing by the growth rate alone instead of (discount rate – growth), or using a perpetual growth rate above the long-run growth of the economy.
How do you get from EBITDA to Unlevered Free Cash Flow?
Subtract D&A to get EBIT; multiply by (1 – tax rate) to get NOPAT; add back D&A and other non-cash charges; subtract CapEx; and subtract the increase in net working capital. In one line: unlevered free cash flow = EBIT × (1 – t) + D&A – CapEx – ΔNWC. Interest is left out because the cash flow belongs to all capital providers.
Common mistake: Subtracting interest expense. Unlevered free cash flow is measured before interest.
Which DCF formulas should you know?
Six: unlevered free cash flow, present value, terminal value two ways, enterprise value and equity value.
- Unlevered free cash flow = EBIT × (1 – tax rate) + D&A – CapEx – increase in net working capital
- Present value of a cash flow in year t = cash flow ÷ (1 + discount rate)t
- Terminal value, Gordon growth = final-year FCF × (1 + g) ÷ (discount rate – g)
- Terminal value, exit multiple = final-year EBITDA × an EV/EBITDA multiple
- Enterprise value = present value of the projected cash flows + present value of the terminal value
- Equity value = enterprise value – debt – preferred stock – noncontrolling interest + cash
Keep the growth rate sane. A perpetual growth rate has to stay below the discount rate, or the formula breaks. NYU professor Aswath Damodaran's rule is stricter: a stable growth rate shouldn't exceed the growth rate of the economy the company operates in.
What is the mid-year convention in a DCF?
The mid-year convention assumes each year's cash flow arrives in the middle of the year, not at the end, so you discount year t's cash flow by t – 0.5 years instead of t years. Because the cash arrives sooner, the present value comes out slightly higher.
Discount factor, mid-year = 1 ÷ (1 + discount rate)t – 0.5
A standard DCF discounts year 1 by a full year, year 2 by two years, and so on. That treats every dollar as if it arrived on December 31. Most businesses earn cash all year long, so on average a year's cash shows up around mid-year. The convention moves each cash flow half a year earlier: year 1 at 0.5, year 2 at 1.5, year 3 at 2.5.
A worked example
Three years of unlevered free cash flow, $100, $110 and $121 million, discounted at a 10% WACC:
| Year | Cash flow | End-of-year factor (t) | Present value | Mid-year factor (t – 0.5) | Present value |
|---|---|---|---|---|---|
| 1 | 100 | 0.9091 | 90.91 | 0.9535 | 95.35 |
| 2 | 110 | 0.8264 | 90.91 | 0.8668 | 95.35 |
| 3 | 121 | 0.7513 | 90.91 | 0.7880 | 95.35 |
| Total | 331 | 272.73 | 286.04 |
The mid-year total is about 4.9% higher. That's no accident: moving every cash flow half a year earlier multiplies each present value by 1.100.5 ≈ 1.0488. In an interview, “it raises the value of the projected cash flows by roughly half a year of the discount rate” is the one-line answer.
When should you use it, and what about terminal value?
Use it when the company generates cash fairly evenly through the year, which is most operating businesses. Skip it, or say so, when cash is lumpy or arrives at a known date, such as a large year-end payment or a highly seasonal business that earns most of its cash in one quarter.
Terminal value is the follow-up interviewers like. With the exit multiple method, the terminal value is a sale price at the end of the final year, so you discount it by the full N years. With the Gordon growth method, many bankers discount it by N – 0.5 years to match the mid-year timing of the cash flows it's built from. Whichever you choose, say which one and why: the answer that loses points is not knowing the difference exists.
Which firms ask these questions?
In Superday Room's bank, candidates reported 161 DCF questions from interviews at 33 named firms. The firms with the most reports: J.P. Morgan (16), Evercore (15), Moelis & Co. (15), Morgan Stanley (13), Citi (12) and Goldman Sachs (10). These are candidates' reports, counted November 1, 2026. Questions by firm →
Superday Room's full bank has more than 240 DCF questions. The 3 on this page are free to practice out loud; the rest come with the Recruiting Season Pass.
Sources
- Aswath Damodaran, NYU Stern, “The Stable Growth Rate”.