Interview prep · DCF & WACC
DCF & WACC interview questions
'Walk me through a DCF' is the most predictable technical prompt in banking interviews, which is exactly why it decides so little on its own. Everyone prepared a walkthrough; interviewers use yours as a map of where to start digging. The category really tests whether you understand the machine behind the recitation.
A clean opening answer covers unlevered free cash flow, discounting at WACC, terminal value, and the bridge from enterprise to equity value. Follow-ups then attack the components: why free cash flow is unlevered, what goes into WACC and where each input comes from, why you unlever and relever beta, and the two ways to compute terminal value with a sanity check between them. By the superday, expect curveballs — how the valuation moves when a single assumption changes, why the terminal value often dominates and whether that worries you, and when a DCF is the wrong tool entirely.
The strongest preparation treats the walkthrough as a spine with branches. Know the sixty-second version cold, then drill every component question hanging off each step, so that wherever the interviewer digs, you are still on prepared ground.
Free sample questions, answered
Walk me through a DCF.+
Project unlevered free cash flow for ~5-10 years. Discount each year back at WACC. Estimate a terminal value at the end (Gordon growth or exit-multiple method) and discount it too. Sum the discounted cash flows plus discounted terminal value to get enterprise value. Subtract net debt to get equity value, then divide by diluted shares for value per share.
⚠ Common wrong answer: "Project net income for five years, discount it back at WACC, and add it up." Why it fails: Two claimant mismatches at once: net income is post-interest (an equity metric) while WACC is a blended all-capital rate — and skipping the terminal value throws away most of the firm's value. You want unlevered FCF plus a discounted TV.
Why do you use unlevered free cash flow in a DCF and how do you calculate it?+
Unlevered FCF excludes financing effects, so it's available to all capital providers and pairs with WACC and enterprise value. Calc: EBIT x (1 - tax rate) + D&A - capex - increase in net working capital. Start from EBIT, not net income, to strip out interest.
⚠ Common wrong answer: "Start from net income, add back D&A, then subtract capex and working-capital increases." Why it fails: Net income already has interest expense in it, so the cash flow is contaminated by capital structure — and the tax shield gets double-counted once you discount at WACC. Start from EBIT and tax it at the marginal rate.
What is WACC and how do you calculate it?+
Weighted average cost of capital - the blended required return of all capital providers, used as the DCF discount rate. WACC = E/V x cost of equity + D/V x cost of debt x (1 - tax rate), where E and D are market values of equity and debt and V = E + D. Cost of equity usually comes from CAPM: risk-free rate + beta x equity risk premium.
What are the two ways to calculate terminal value, and how do they differ?+
Gordon (perpetuity) growth: TV = final-year FCF x (1 + g) / (WACC - g), assuming cash flows grow forever at a modest rate g. Exit multiple: TV = final-year metric (e.g., EBITDA) x a market multiple. Gordon is more theoretical/intrinsic; exit multiple is more market-based. Best practice is to cross-check one against the other.
DCF & WACC: what candidates ask
How long should my 'walk me through a DCF' answer be?+
Common advice is to keep the top-level walkthrough concise — on the order of a minute or two — hitting every major step without diving into any of them. Interviewers signal where they want depth through follow-ups; a candidate who monologues for five minutes looks like they are avoiding questions, while one who covers the spine crisply invites the dialogue the round is designed around.
Do I need to memorize the WACC and terminal value formulas?+
Yes — the core set is small and expected: the WACC formula, the cost of equity via CAPM, and the growing-perpetuity terminal value. But memorization is the floor, not the goal. Interviewers routinely ask what happens to the output when an input changes, which only understanding answers. Know the formulas and the direction every input pushes.
What are the most common DCF follow-up questions?+
Two families dominate. Sensitivity questions change one assumption — the discount rate, growth, margins — and ask how the valuation responds. Component questions probe a single ingredient: a WACC input, beta mechanics, or the choice between terminal value methods. Both reward the same preparation: understanding what each piece of the model does rather than reciting the sequence.
Every DCF & WACC question in the bank
All 118 published questions from DCF & WACC — each links to its own page. Free ones show the full model answer.
21
- What does beta measure, and what does a beta of 1.3 tell you?
- What is sensitivity analysis in a DCF and which variables do you typically sensitize?
- What is WACC and what does it represent?
- Write out the standard WACC formula.
- What are the three (or four) components of WACC?
- How do you estimate the cost of equity?
- Is the cost of equity or the cost of debt higher, and why?
- A firm is all-equity financed. What is its WACC?
- What is terminal value in a DCF and why do you need it?
- What are the two standard methods for calculating terminal value, and what do they conceptually assume?
- After you compute terminal value by either method, what do you do with it next?
- How do you calculate the cost of preferred stock, and why is there no (1 - t) adjustment?
- Why does a DCF discount free cash flow rather than net income?
- What is the present value of a simple perpetuity, and how does that connect to the DCF terminal value?
- Why do you discount cash flows at WACC instead of the risk-free rate?
- How long should the explicit forecast period in a DCF be, and what determines it?
- Two companies have identical projected free cash flows. One is a stable utility, the other a volatile tech firm. Which has the higher DCF value and why?
- What is a discount factor? Calculate the discount factor for year 3 at a 10% discount rate.
- Why does a DCF use projected future cash flows rather than historical results?
- What inputs and assumptions do you need to gather before you can build a DCF?
- Rank debt, preferred stock, and common equity from cheapest to most expensive source of capital, and explain the ordering.
59
- Walk me through a DCF.free
- Why do you use unlevered free cash flow in a DCF and how do you calculate it?free
- What discount rate do you use if you're discounting levered free cash flow?
- Two identical companies, one has more debt. Which has the higher WACC?
- What's the difference between unlevered and levered free cash flow, and which discount rate pairs with each?
- How do you calculate unlevered free cash flow, starting from EBIT?
- How do you calculate levered free cash flow?
- Why is unlevered DCF used far more often than levered DCF in practice?
- Write out the WACC formula and define every component.
- How do you calculate the cost of equity?
- How do you estimate the cost of debt?
- Why is the cost of debt multiplied by (1 - tax rate) in WACC, but the cost of equity is not?
- Should you use market values or book values for the debt and equity weights in WACC, and why?
- What are the two methods for calculating terminal value, and what are their formulas?
- What's a reasonable range for the perpetuity growth rate, and why can't it exceed a certain level?
- Why does terminal value usually represent 60-80% of the total enterprise value in a DCF, and is that a problem?
- What is the mid-year convention and why is it used?
- What assumptions drive a DCF the most?
- When is a DCF NOT an appropriate valuation methodology?
- Why is a DCF often described as both the most theoretically sound and the least reliable valuation method?
- How does a change in net working capital affect free cash flow?
- Once you have enterprise value from a DCF, how do you get to equity value and then to value per share?
- In a DCF, why do you subtract net debt rather than total debt when bridging from enterprise value to equity value?
- Should WACC weights use market values or book values, and why?
- Market value of equity is easy for a public company. How do you get the market value of debt?
- In CAPM, what do you use for the risk-free rate and why?
- What is the equity risk premium and roughly what range is used?
- What is beta and what does a beta of 1.0, 1.5, and 0.5 each imply?
- Why does adding debt increase a company's equity beta?
- How do you estimate the pre-tax cost of debt?
- Which tax rate should you use in WACC - the effective rate or the marginal rate?
- Walk through a numerical WACC calculation: equity $600M, debt $400M, Re = 12%, pre-tax Rd = 6%, tax = 25%.
- Why is using book value of equity in WACC weights especially dangerous?
- How does a higher WACC affect a DCF valuation, all else equal?
- Should WACC be the same for every company in a sector? When would you adjust it?
- If interest rates rise, what happens to WACC?
- A junior analyst used the coupon rate on existing bonds as the cost of debt. Why is that wrong?
- Conceptually, why is WACC the right discount rate for unlevered free cash flow?
- Write the Gordon growth terminal value formula and be precise about which year's cash flow goes in the numerator.
- Write the exit-multiple terminal value formula and explain what the TV represents in time.
- Which terminal value method gives a higher valuation - Gordon growth or exit multiple? What does it depend on?
- Which method do bankers tend to favor in practice, and why does it vary by context?
- What is a reasonable range for the perpetuity growth rate, and what is the hard ceiling?
- Why must the perpetuity growth rate be strictly less than WACC? What happens mathematically if it isn't?
- Show the mid-year convention math: what is the PV of a $100 year-1 cash flow at a 10% WACC under year-end vs. mid-year discounting, and roughly how much does mid-year lift the whole DCF?
- Worked example: WACC is 10%, perpetuity growth is 2.5%, terminal-year FCF is 150 and terminal-year EBITDA is 250. Compute the Gordon growth TV and the implied exit multiple, then judge it.
- Worked example: terminal-year EBITDA is 300, exit multiple is 9.0x, terminal-year FCF is 180, WACC is 9%. What perpetuity growth rate does the exit multiple imply, and is it reasonable?
- Worked example: a comp has a levered beta of 1.20, D/E of 0.50, and a 25% tax rate. Unlever it, then relever at a target D/E of 0.80 and compute the cost of equity with a 4% risk-free rate and 5% ERP.
- What is a reverse DCF and when is it useful?
- Your company has negative free cash flow for the first three forecast years. Can you still run a DCF, and what should you watch for?
- Can the perpetuity growth rate in a terminal value be negative? When would you use one?
- What does a well-built DCF sensitivity table look like? Give best practices.
- When would you actually choose a levered DCF (discounting FCFE) over the standard unlevered DCF?
- A private company has no traded bonds and no credit rating. How do you estimate its cost of debt?
- Two data services report different betas for the same stock. What estimation choices drive the differences?
- How does a very large cash balance distort a company's observed beta, and what does that mean for your WACC?
- You are valuing a company on September 30; its fiscal year ends December 31. How do you build and discount the stub period, and where does the stub FCF number come from?
- What are the main criticisms of CAPM, and why do banks keep using it anyway?
- What alternatives to CAPM exist for estimating the cost of equity?
38
- What is WACC and how do you calculate it?free
- What are the two ways to calculate terminal value, and how do they differ?free
- A DCF gives a value that seems too high. Which assumptions would you check first?
- What's the difference between levered and unlevered beta, and why unlever it?
- Why do you unlever and then relever beta? Walk through the mechanics.
- Why use comparable companies' betas to relever rather than just using the target's own historical beta?
- What capital structure should you assume in WACC - the company's current one or something else?
- How do you cross-check the two terminal value methods against each other?
- How does the mid-year convention affect the terminal value, and does it differ by TV method?
- What is a stub period and how do you handle it in a DCF?
- What does it mean to 'normalize' free cash flow, and why does it matter for the terminal year?
- How should net operating losses (NOLs) be treated in a DCF?
- How should stock-based compensation (SBC) be treated in unlevered free cash flow?
- Name several common mistakes people make when building a DCF.
- Why do you unlever and then relever beta when estimating cost of equity for a target?
- Give the Hamada formula for unlevering and relevering beta (ignoring debt beta).
- If debt is cheaper than equity, why doesn't a company finance itself entirely with debt to minimize WACC?
- What capital structure (weights) should you use in WACC - the current one or a target?
- Where do operating leases fit into the WACC and capital-structure picture?
- Your DCF's terminal value uses WACC - g. What happens as WACC approaches the perpetuity growth rate g?
- How do you handle WACC for a company whose cash flows are in a foreign currency or emerging market?
- Why might you lever up the betas of comparable companies differently when valuing a private company?
- What is a size premium and when is it added to the cost of equity?
- There's circularity between WACC and capital-structure weights when you compute equity value from a DCF. How is that handled?
- Walk me through cross-checking an exit-multiple terminal value using the Gordon growth method.
- Walk me through cross-checking a Gordon growth terminal value using an implied exit multiple.
- Derive the implied perpetuity growth rate from a terminal value. Show the algebra.
- A reasonable terminal value cross-check question: your exit multiple is 10x EV/EBITDA but the implied perpetuity growth comes out to 5%. What does that tell you and what do you do?
- Should the terminal-year free cash flow used in the Gordon growth formula be the raw final-year FCF, or normalized? Explain.
- What is the adjusted present value (APV) method, and when is it better than a WACC-based DCF?
- Should an unlevered DCF and a levered (FCFE) DCF give the same equity value? Why do they diverge in practice?
- Walk me through valuing a company's NOLs as a separate asset in a DCF.
- Walk me through building a WACC for a private company end-to-end.
- How do you actually estimate a country risk premium (CRP) for an emerging-market DCF, and how do you apply it?
- Where do size premium estimates actually come from, and what are the main criticisms of adding one to the cost of equity?
- State the value-driver terminal value formula linking growth, ROIC, and reinvestment, and show why growth adds no value when ROIC equals WACC.
- Beyond the WACC-weights problem, where does circularity arise inside a levered DCF or three-statement model, and how do you break it?
- Your DCF says the company is worth double its current market price. Walk me through how you debug it.
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