How to Answer "Walk Me Through a DCF" in 2026 IB Interviews

Why This Question Matters

"Walk me through a DCF" is the single most asked question in investment banking interviews. It appears in first-round phone screens, superdays, and even lateral interviews. Getting it right signals that you understand the foundation of valuation.

The 5-Step Framework

Here's the framework that top candidates use:

1. Project Free Cash Flows

Start with revenue and build down to Unlevered Free Cash Flow (UFCF):

• Revenue
• Less: COGS and operating expenses
• Equals: EBIT
• Less: Taxes (using the marginal tax rate)
• Plus: Depreciation & Amortization
• Less: Capital Expenditures
• Less: Changes in Net Working Capital
• Equals: Unlevered Free Cash Flow

Typically project 5-10 years of cash flows based on management guidance, equity research, and your own assumptions.

2. Calculate Terminal Value

Use one of two methods:

• Perpetuity Growth Method: TV = Final Year FCF x (1 + g) / (WACC - g), where g is the long-term growth rate (usually 2-3%)
• Exit Multiple Method: TV = Terminal Year EBITDA x Exit EV/EBITDA Multiple

Most bankers use both and triangulate. The exit multiple method is more common in practice.

3. Determine WACC

WACC blends the cost of equity and after-tax cost of debt:

• Cost of Equity = Risk-Free Rate + Beta x Equity Risk Premium (CAPM)
• Cost of Debt = Yield on comparable debt x (1 - Tax Rate)
• Weight each by target capital structure (not current)

4. Discount to Present Value

Discount each year's FCF and the terminal value back to today using WACC. Use mid-year convention if cash flows are generated throughout the year.

5. Calculate Implied Share Price

• Sum of PV of FCFs + PV of Terminal Value = Enterprise Value
• Subtract Net Debt (total debt minus cash)
• Subtract minority interests, preferred stock
• Add equity investments
• Divide by diluted shares outstanding
• Equals: Implied Share Price

Common Follow-Up Questions

Interviewers will probe deeper. Be ready for:

• "What drives the most sensitivity in a DCF?" (Terminal value assumptions — growth rate and exit multiple)
• "When would you NOT use a DCF?" (Early-stage companies with no predictable cash flows, banks/financial institutions)
• "Walk me through how you'd calculate WACC for a private company" (Use comparable public company betas, unlever and relever)

Practice Makes Perfect

Knowing the theory isn't enough — you need to articulate it clearly under pressure. See our complete DCF interview questions guide for more practice. IB Flash lets you practice DCF questions with AI-powered scoring using our Question Bank and DCF Calculator — grading your response on accuracy, structure, and depth, just like a real interviewer would.