If an interviewer says "walk me through how you'd calculate Enterprise Value with a DCF," they're not expecting a ten-tab Excel model on a whiteboard. They're testing whether you can execute the calculation cleanly with a handful of numbers. Here's exactly how to do it, step by step.
Step 1: Lay out the free cash flow forecast
Start by listing the free cash flow figure for each year in your explicit forecast period, along with the discount rate you'll use (typically WACC). For example:
| Year | Free Cash Flow |
|---|---|
| 1 | $20.0m |
| 2 | $22.0m |
| 3 | $24.0m |
Discount rate (WACC): 10.0% (0.10)
Step 2: Apply the present value formula to each year
The formula is: PV = FCF / (1 + r)^n, where FCF is that year's free cash flow, r is the discount rate, and n is the number of years until the cash flow arrives. Work through the years one at a time:
| Year | Calculation | Present Value |
|---|---|---|
| 1 | $20.0m / (1.10)^1 | $18.2m |
| 2 | $22.0m / (1.10)^2 | $18.2m |
| 3 | $24.0m / (1.10)^3 | $18.0m |
Notice that Year 3's present value is slightly lower than Year 1's and Year 2's, even though the underlying free cash flow keeps growing. That's because free cash flow grew exactly 10% from Year 1 to Year 2, matching the discount rate and keeping present value flat, but only 9.1% from Year 2 to Year 3, so the extra year of discounting wins out. Interviewers like this kind of detail because it shows you understand the mechanics rather than just running a formula on autopilot.
Step 3: Sum the present values to get Enterprise Value
Add up the three present values: $18.2m + $18.2m + $18.0m = $54.4m. That figure is your Enterprise Value — what the operating business is worth today, based purely on the cash flow you've projected and discounted.
What a real DCF adds on top of these three steps
A complete, real-world DCF builds on exactly this mechanical core, with two additions. First, a Terminal Value captures the cash flows a business generates beyond the last explicit forecast year, since few companies simply stop generating cash after year three or five — Case 37: Terminal Value: Gordon Growth covers how that's calculated using the Gordon Growth method. Second, the discount rate itself is usually built up from scratch using CAPM cost of equity and after-tax cost of debt rather than handed to you as a given 10% — see Case 36: WACC: The Building Blocks for that build-up.
Practice the calculation yourself
Case 38: Simple DCF: Three Steps gives you the same three-year free cash flow forecast and discount rate used above, so you can practice the calculation and check your answer against a full worked solution, including the mistakes candidates most commonly make on this exact question.
Common mistakes to avoid
The most frequent error is summing the raw, undiscounted free cash flows instead of their present values, which inflates Enterprise Value by ignoring the time value of money entirely. A close second is mixing up the discount factor's exponent — Year 2's cash flow needs (1 + r)^2 in the denominator, not (1 + r)^1. And remember that this calculation produces Enterprise Value, not Equity Value — you'd still need to subtract net debt and other adjustments to get to what equity holders actually receive.