Oct 08, 2026 by Offer

Walk me through a DCF (With Examples): Interview Answer Guide 2027

This dcf interview question becomes much easier with numbers. Imagine a hypothetical company generating $100 million of free cash flow this year, growing 5% annually for five years, discounted at a 10% WACC with 2% perpetual growth after that. The mechanics below show exactly how the pieces add up to an enterprise value of about $1.41 billion.

What This DCF Interview Question Tests

A discounted cash flow (DCF) analysis values a company based on the cash it is expected to generate in the future, not on what similar companies trade for today.

How to Answer This DCF Interview Question

Work through a simplified illustration to show you understand the mechanics. Assume a hypothetical company with $100 million of free cash flow in year one, growing 5% per year through year five: roughly $100m, $105m, $110m, $116m, and $122m. Discount each year at a 10% WACC.

For the terminal value, take year-six cash flow of about $128 million and apply perpetuity growth of 2%: $128m ÷ (10% − 2%) = $1.6 billion at the end of year five. Discount that back five years at 10% and you get roughly $994 million.

Common Mistakes on the DCF Interview Question

Stopping at enterprise value. A DCF produces enterprise value; the interviewer wants equity value per share, so you must subtract net debt (and adjust for minority interest and other claims where relevant) before dividing by shares outstanding.

Discounting at the wrong rate. Unlevered free cash flow gets discounted at WACC. Discounting it at the cost of equity instead is a classic error — cost of equity belongs to levered (equity) cash flows.

An impossible terminal growth rate. Perpetuity growth above long-run nominal GDP growth implies the company eventually becomes larger than the economy. Keep it at or below that ceiling or your answer loses credibility.

This is the kind of technical question that commonly decides interview rounds — candidates report that one hesitant or rambling answer here can end the process on the spot. Practice saying your answer out loud until it sounds calm, structured, and confident.

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FAQ

Why do you discount free cash flow at WACC instead of the cost of equity?

Unlevered free cash flow belongs to all capital providers — both debt and equity holders — so it must be discounted at the blended cost of both, which is WACC. Cost of equity is only correct for levered cash flows that belong to shareholders alone.

What are the two terminal value methods, and which is better?

The perpetuity growth method assumes cash flows grow forever at a stable rate; the exit multiple method applies an EV/EBITDA multiple in the final year. Neither is universally better — practitioners often compute both and compare as a sanity check.

Why is a DCF called an intrinsic valuation?

Because it derives value from the company's own expected cash flows rather than from market prices of comparable companies. That makes it independent of market sentiment, but also entirely dependent on your assumptions.

How sensitive is a DCF to its inputs?

Extremely — small changes in WACC or terminal growth can swing the output by 20% or more, since the terminal value often represents most of the total. Always present a sensitivity table rather than a single point estimate.

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