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hardFinancial Analyst interview question

Walk me through a DCF valuation from start to finish.

What the interviewer wants to hear

  • Forecast unlevered free cash flow for 5 to 10 years from operating drivers
  • Discount at WACC
  • Terminal value by perpetual growth or exit multiple, then discount it
  • Sum to enterprise value and bridge to equity value
  • Divide by diluted shares and run sensitivities

Model answer

I first forecast the business for five to ten years: revenue from volume and price drivers, margins, capex and working capital. From that I calculate unlevered free cash flow each year: EBIT less tax, plus depreciation, minus capex, minus the increase in net working capital. Next I estimate WACC, using CAPM for cost of equity and the after-tax cost of debt, weighted by a target capital structure. I discount each year of free cash flow at WACC. Then I calculate a terminal value, either with the perpetual growth method, where growth should be no higher than long-run nominal GDP, or with an exit multiple, and discount it back from the final year. The sum is enterprise value. I subtract debt and similar claims, add cash, to get equity value, and divide by diluted shares. Finally I run sensitivities on WACC, growth and margins and cross-check the result with trading comparables.

Can you answer it under time pressure?

Take a timed hard round and get scored on every answer.

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