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“Walk Me Through a DCF” — The Best Answer I’ve Ever Seen
How to Nail the Most Feared Interview Question in Banking
Afzal Hussein
July 18, 2025
Hey 👋!
I’m going to be honest with you. You might have a perfect CV. You might have work experience. But if you want to work in investment banking and can’t explain what a DCF (Discounted Cash Flow) is or how it works, you’ve already signalled to the interviewer: “I haven’t prepared properly.”
So today I thought I’d explain and teach you exactly how to craft a masterful response for it. And you’ll be pleased to know it’s all 100% learnable (if you spend the time understanding it).
So, by the time you finish this email, you’ll be able to walk through a DCF in your own words — clearly, confidently, and with that “this candidate knows their stuff” energy.
First — Why Do They Even Ask This?
“Walk me through a DCF” is one of those questions that separates the prepared from the pretenders.
It’s not just about theory. It tests:
Your technical knowledge of valuation
Your understanding of business fundamentals
Your ability to explain complex things simply
Your confidence under pressure
Most candidates waffle. They memorise a script they don’t understand. They panic halfway and get lost in jargon. And the interviewers can see straight through them.
Don’t be that candidate.
What Is a DCF (Actually)?
Let’s make this simple.
A DCF (Discounted Cash Flow) is a valuation method used to estimate the intrinsic value of a business based on the cash it will generate in the future.
You’re basically asking:
“If this business generates £X million in free cash flow (the cash a company has left after spending money to support and maintain its operations and capital assets) each year into the future, what is all that cash worth today?”
Because money in the future is worth less than money today (time value of money), you need to discount those future cash flows back to today’s value.
The Structure of a Killer Answer
Here’s a solid 6-step answer for you. Memorise it. Understand it. Use it:
1. Project Free Cash Flows
“We start by projecting the company’s free cash flows over the next 5–10 years, usually based on revenue growth, margins, working capital, and capital expenditures.”
👉 Interviewer wants to know: Do you understand what actually drives value?
Don’t just say “project FCF” — show that you know it’s based on real inputs.
Pro tip: Define free cash flow if asked:
“Free cash flow is the cash available to all investors (both debt and equity holders) after operating expenses, taxes, and reinvestments like capex and working capital.”
2. Calculate the Terminal Value
“After the projection period, we estimate the Terminal Value, which accounts for the value of the business beyond the projection period. This is typically done using either the Gordon Growth method or an Exit Multiple approach.”
👉 Interviewer wants to know: Do you understand how we deal with infinity?
Explain both briefly:
Gordon Growth assumes the business grows cash flow at a steady rate forever.
Exit Multiple applies a multiple (like EV/EBITDA) to the final year’s cash flow.
Pro tip: Mention both methods even if the interviewer doesn’t ask. It shows breadth. Do this (offer more information) for any interview as it’s such a simple way of standing out.
3. Discount Cash Flows Back to Present Value
“We discount the projected free cash flows and terminal value to present value using the Weighted Average Cost of Capital (WACC) as the discount rate.”
👉 Interviewer wants to know: Do you get time value of money + risk adjustment?
WACC represents the blended cost of capital for both debt and equity investors.
The higher the WACC, the lower the valuation — because future cash is being discounted more heavily.
4. Add the Two Components
“The sum of the discounted cash flows and the discounted terminal value gives us the Enterprise Value of the business.”
👉 Be concise and clear. Don't ramble.
5. Move from Enterprise Value to Equity Value
“To get from Enterprise Value to Equity Value, we subtract net debt (debt minus cash) and adjust for any other non-operating assets or liabilities like minority interest or investments.”
👉 Interviewer wants to know: Do you understand the capital structure?
A lot of these terms will make a lot more sense if you take a simple accounting 101 course. Alternatively, just ask ChatGPT to create a list of accounting terms and explanations for investment banking. (If I can find the time I’ll make one for you!)
6. Divide by Shares Outstanding
“Finally, we divide the Equity Value by the number of diluted shares outstanding to get the intrinsic value per share.”
Boom. Done. That’s a textbook walkthrough. Now let’s level it up.
How to Stand Out: Show You Actually Understand It
Most candidates stop at the script.
The top 1% go deeper, and it’s easier to do so because understanding something creates confidence — they understand, they add context, they reference assumptions, they anticipate follow-ups. And subsequently bag a few offers.
Here’s how you can stand out:
1. Nothing Beats an Example
Say something like:
“Let’s say we’re analysing a consumer goods company. I’d project 5 years of FCF based on modest revenue growth, stable margins, and reinvestment needs. I’d then apply a 10x EV/EBITDA exit multiple to the final year to get the terminal value and discount everything using a WACC of ~9%.”
That kind of answer signals to the interviewer: “This person can actually apply this.”
2. Mention Key Assumptions
Add this near the end:
“Of course, the final valuation is highly sensitive to assumptions — especially the discount rate, terminal value, and growth projections — so I’d always run a sensitivity analysis to test different scenarios.”
This shows maturity. It shows you know DCFs aren’t crystal balls. They’re models — useful, but sensitive.
3. Be Ready for Follow-Ups
The minute you finish your DCF answer, expect:
“How do you calculate WACC?”
“What’s a reasonable terminal growth rate?”
“What’s the difference between levered and unlevered FCF?”
“How do you decide on a discount rate?”
“Why use DCF over other methods?”
If you’re serious about banking, prepare for all of these. Use this 100 IB Q&A resource.
If you’re in Finance Fast Track, we go through mock interviews and so much more every week on calls.
The Biggest Mistakes Candidates Make
Let me be clear — most candidates mess this up. Here’s how:
❌ They recite a memorised script
If it sounds like you’re reading something off Mergers & Inquisitions, you’ve lost the room.
❌ They don’t understand the meaning behind the steps
They say “WACC” but don’t know it blends debt and equity costs.
They say “terminal value” but don’t understand why it’s so dominant in the valuation. Do you know why? Go find the answer NOW.
❌ They forget to speak like a normal human
Technical doesn’t mean robotic (can’t stress this enough!). You’re still a person having a conversation. Imagine you’re talking to a friend (but don’t be too casual and relaxed).
What Interviewers Are Really Looking For
It’s not about giving the “perfect” answer.
It’s about giving a structured, confident, and clear answer that shows:
You’ve put in the work
You understand the logic
You’re not afraid to talk numbers
You’re coachable and think like a banker
These are the things that get you the offer. They don’t expect you to be perfect and they know you don’t know everything. All they expect is that you’re curious, interested and have made an effort to learn already.
Final Recap: The DCF Walkthrough in 6 Lines
You’ll want to write this down.
Project free cash flows for 5–10 years
Calculate the terminal value
Discount both using WACC
Add them to get Enterprise Value
Subtract net debt to get Equity Value
Divide by shares outstanding for intrinsic share price
Learn it. Understand it. Speak it like it’s second nature. Practice makes perfect!
Because this question isn’t going away — and once you master it, everything else gets easier.
Want More Like This?
You’ve got two options:
📘 Option 1:
Buy my book — Breaking Into Banking — today and get £180 worth of exclusive Finance Career Guides for free.
Just email me a screenshot of your order confirmation.
💼 Option 2:
You’ll get 4 weekly calls with me, 200+ resources, full CV/cover letter support, and a guaranteed spring week, internship or grad scheme offer in 120 days — or your money back.
Oh — and there’s a 7-day refund policy if you don’t love it.
Zero risk. High upside.
Let’s get you into banking — the smart way.
Afzal 👊🏽
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