Full DCF Recap & Interview Prep
Step back from the details and see the whole DCF. We'll connect free cash flow, unlevered free cash flow, WACC, cost of equity, and terminal value into one clean story you can use in modeling tests and technical interviews.
Analyst Objective
Be able to explain a DCF from start to finish in plain English, connect each modeling step to the underlying finance logic, and answer common DCF interview questions without rambling.
What You'll Learn in This Recap
The DCF in One Slide d From Statements to Share Price
Across Lessons 1d5 you built each piece of the DCF separately. This recap stitches them together. At a high level, a classic unlevered DCF goes:
When you are in an interview or case study, this is the mental map you want to have in your head: start with the operating model, translate it into cash flows, apply a risk-adjusted discount rate, handle the long-term with a terminal value, and then bridge from enterprise value to equity value and share price.
1. Start with 3-statement model 2 Forecast revenue, margins, working capital, capex (Lessons 1d3) 2. Derive Unlevered Free Cash Flow (UFCF) 2 EBIT * (1 - tax) + D&A - 9WC - Capex 3. Compute discount rate (WACC) 2 Cost of equity (CAPM) + cost of debt + capital structure (Lesson 4) 4. Forecast UFCF for 5d10 years and discount at WACC 5. Estimate terminal value 2 Exit multiple or Gordon growth (Lesson 5) 6. Sum PV of forecast + PV of terminal = Enterprise Value 7. EV - net debt & adjustments = Equity Value 8. Equity value / diluted shares = Implied share price
Interview soundbite: "A DCF takes unlevered free cash flow from a 3-statement forecast, discounts it at WACC, adds a terminal value, and then bridges from enterprise value to equity value and share price."
Free Cash Flow vs. Unlevered Free Cash Flow
In Lesson 2 and 3 you saw different flavors of cash flow. For DCF interviews you should clearly distinguish:
Thinking in terms of FCFE vs. UFCF also helps you understand how a model is wired. If you see interest expense flowing through the cash flow block and the discount rate is cost of equity, you are in an equity DCF. If the cash flow block is pre-interest and the discount rate is WACC, you are in an unlevered DCF.
Free Cash Flow to Equity (FCFE)
- Cash available to equity holders after interest and debt flows.
- Starting point often net income.
- Discount at cost of equity (not WACC) in an equity DCF.
- Useful if you explicitly want an equity-only view.
Unlevered Free Cash Flow (UFCF)
- Cash flow available to all capital providers before interest.
- Classic formula: EBIT - tax + D&A - 9WC - Capex.
- Discount at WACC to get enterprise value.
- This is what you've been modeling in the prior lessons.
Interview line: "In banking we usually run unlevered DCFs. We forecast unlevered free cash flow, discount at WACC to get enterprise value, then bridge to equity value. FCFE discounted at cost of equity is conceptually valid but less common on the desk."
Terminal Value d Methods, Intuition, and Pitfalls
Lesson 5 focused on terminal value. The interview expectation is that you can summarize both methods and when you'd use each.
In practice you will usually sanity-check both approaches: you might anchor your base case on a Gordon growth output but then see what multiple that implies vs. trading comps, or vice versa. Being able to talk through that cross-check is far more impressive than quoting a formula.
Exit Multiple Method
- Apply a trading or transaction multiple (EV/EBITDA, EV/EBIT) to a steady-state metric in the final forecast year.
- Anchored in market data; easy to explain to clients.
- Risk: you silently double-count market sentiment if comps are rich.
Gordon Growth (Perpetuity) Method
- Assume UFCF grows at a constant rate g forever.
- Formula at the end of Year N:
TV = UFCFN+1 / (WACC - g) - Forces you to think about long-term fundamentals (ROIC vs. growth).
How It Fits Into the Model
You calculate the terminal value in the final forecast year, then discount thatsingle lump sum back to today using the same WACC and timing convention as your UFCFs. In most practical DCFs, 50d80% of enterprise value comes from this block, so being thoughtful about g and the chosen multiple matters more than obsessing over Year 3 capex.
WACC, Cost of Equity, and Cost of Debt d Formula Recap
Lesson 4 went deep on WACC. For interviews, you should be able to write these formulas from memory and explain each term quickly.
You do not need to be a quant to talk about WACC well. What interviewers listen for is whether you understand that the discount rate reflects the risk of the cash flows and the mix of debt and equity financing, not whether you can recite every step of a bottom-up beta build.
Cost of Equity (CAPM)
Re = Rf + b2 * (Rm - Rf)
- Rf = risk-free rate (long-term government bond).
- Rm - Rf = market risk premium.
- b2 = measure of how risky the stock is vs. the market (Lesson 4 bottom-up beta).
Cost of Debt and WACC
After-tax cost of debt: Rd * (1 - Tax) WACC = (E / (E + D)) * Re + (D / (E + D)) * Rd * (1 - Tax)
- E and D are market values of equity and debt.
- Use target capital structure, not today's exact mix.
- Tax shield is why cost of debt is after-tax in WACC.
Interview line: "In an unlevered DCF we discount UFCF at WACC because those cash flows are available to both debt and equity holders. If we were modeling FCFE instead, we'd discount at cost of equity and go straight to equity value."
Why Bankers Actually Use (and Don't Use) DCFs
Across the earlier lessons you have seen DCFs used alongside trading comps and transaction comps. The recap here is to help you explain when a DCF is the right tool and when it should just be one of several reference points.
When DCFs Are Powerful
- Business has reasonably predictable cash flows.
- You want a view anchored in fundamentals (ROIC, growth) rather than market noise.
- Used as a cross-check alongside trading and transaction comps.
Where DCFs Struggle
- Highly cyclical or early-stage businesses with no stable cash flow base.
- Situations where terminal value assumptions drive over 80% of EV.
- Deals priced primarily off market multiples or strategic premiums.
Great way to answer "Why do we use a DCF?": "A DCF lets us value a business based on the cash it can generate over time, rather than just the multiples of peers. In practice we use it alongside trading and transaction comps to check whether the implied valuation is supported by fundamentals."
DCF Interview Questions You Should Be Ready For
Use this as a quick checklist. Try answering each question out loud in 30d60 seconds, then cross-check with the earlier lessons.
1. Walk me through a DCF from revenue to implied share price.
2. What's the difference between free cash flow and unlevered free cash flow?
3. Why do we discount UFCF at WACC but FCFE at cost of equity?
4. How do you calculate unlevered free cash flow starting from EBIT?
5. Explain the intuition behind the CAPM formula for cost of equity.
6. How would you estimate WACC for a private company?
7. Compare the exit multiple and Gordon growth methods for terminal value.
8. What are some reasonable ranges for terminal growth in a mature market?
9. How sensitive is a DCF to changes in WACC and terminal growth?
10. When would you NOT rely heavily on a DCF in a pitch?
11. What are the biggest sources of error in a DCF model?
12. How would you sanity-check the output of your DCF?
End-of-Module Takeaways
A DCF is just: forecast UFCF, discount at WACC, add a sensible terminal value, and bridge from enterprise value to equity.
Understanding the why behind FCF/UFCF, WACC, and terminal value is more important than memorizing every line item.
Clear, concise explanations of DCF building blocks will score more points in interviews than ultra-technical jargon.