"Walk me through a DCF" is one of the most common questions in a finance interview, and it's also one of the easiest to answer badly — either too abstractly (naming the three steps without ever touching a number) or too narrowly (reciting the Free Cash Flow formula without connecting it to a discount rate or a terminal value). A strong answer builds the full model end to end: from a multi-year operating forecast, through the discount rate and terminal value, down to a per-share equity value.
The Model Has Four Moving Pieces, Not One Formula
If you've already covered the 3-step logic behind a DCF — project, discount, sum — you know the shape of the answer. Building the full model from scratch means filling in each of those steps properly rather than skipping past them:
- A multi-year Unlevered Free Cash Flow forecast, built from a revenue growth schedule, margin assumptions, CapEx, D&A, and working capital — not a single-year snapshot.
- A discount rate (WACC) that blends the cost of equity and the after-tax cost of debt, weighted by the company's target capital structure.
- A Terminal Value that captures everything beyond the explicit forecast window, almost always using the Gordon Growth (perpetuity growth) formula.
- An equity bridge that takes the resulting Enterprise Value, subtracts Net Debt, and divides by shares outstanding to land on a value per share — a number you can actually compare to where the stock trades.
Each of these pieces has its own mechanics worth understanding on its own terms: what WACC represents and why it's built the way it is, and why Terminal Value tends to dominate the total valuation. Building a full model means knowing how to combine all of them into one coherent answer, not just being able to define each one in isolation.
Why the Full Build Matters More Than Any Single Step
Interviewers rarely care whether you can recite the Gordon Growth formula in isolation — plenty of candidates can. What separates a strong answer is being able to explain how a change in one assumption ripples through the entire model: a higher terminal growth rate inflates the Terminal Value, which is often 70–80% of total Enterprise Value, so it moves the final equity value more than almost any other single input. A lower cost of debt (or a heavier weight toward debt financing) lowers WACC, which increases the present value of every single cash flow in the model, explicit-period and terminal alike.
The Full DCF from Scratch case works through exactly this — a complete five-year build from raw revenue and margin assumptions to a final value per share — with every intermediate figure shown, plus follow-up questions on how the valuation shifts when the terminal growth rate or the capital structure changes.
A Practical Structure for Answering This Question Out Loud
When asked to walk through a DCF from scratch, it helps to narrate the model in the same order you'd actually build it: state the revenue and margin assumptions first, walk through how EBIT becomes Unlevered Free Cash Flow, name WACC and briefly justify its two components, introduce the Terminal Value and note why the growth rate assumption matters so much, then finish with the mechanical bridge from Enterprise Value to a per-share number. Candidates who jump straight to "and then you discount it back" without walking through where the cash flows or the discount rate actually came from tend to leave the interviewer unconvinced that they could rebuild the model unsupervised.