The investment banking interview question we’re going to go over today is “Walk me through a DCF model.” This is a very basic and very common technical question that can come up in investment banking summer analyst and full-time interviews. Here’s exactly how you should answer it.
“The DCF analysis helps us determine the intrinsic value of the company.
The first step is to calculate WACC. We would take the company’s Cost of Equity and after-tax Cost of Debt and weigh them proportionally based on the company’s long term capital structure.
The second step is to project out the company’s Unlevered Free Cash Flow, usually for a period of 5-7 years.
Next, we need to calculate the company’s Terminal Value. We can calculate it using either the Perpetuity Growth Method or the Terminal Multiple Method.
And finally, we would discount the future Unlevered Free Cash Flow and Terminal Value back to the present using WACC, which would give us the intrinsic value of the company.”
And that’s it for the “Walk me through a DCF model” interview question. The key mistake to avoid here is don’t be long-winded. Don’t go into every little detail of the DCF model. Some candidates spend several minutes talking the interviewer through the DCF model. That’s not the right way to do it because it turns into a monologue. Use what we wrote above and keep it short and sweet.
More IBD Questions
Walk me through the three financial statements.
Which financial statement is the most important?
Walk me through a merger model.