Walk me through a DCF analysis.
Answer
(1) Project free cash flows (FCF) for 5–10 years using FCF = EBIT × (1−t) + D&A − CapEx − ΔWorking Capital. (2) Calculate terminal value using either the Gordon Growth Model (FCF × (1+g) / (WACC − g)) or the exit multiple method (EBITDA × multiple). (3) Discount all FCFs and the terminal value back to present using WACC. (4) Sum the PVs to arrive at Enterprise Value. (5) Add cash and subtract debt to get Equity Value. Divide by diluted shares outstanding for implied price per share.
Why interviewers ask this
This is the second-most asked IB question after the three-statement walk. Know all five steps cold. Common follow-ups: How do you calculate WACC? What's the terminal value as a % of total value (typically 60–80%)? What are the biggest sensitivities? Always note that the DCF is most sensitive to WACC and terminal growth rate.