5 DCF Mistakes That Kill Interview Answers
Most candidates butcher the DCF the same way. Here are the five mistakes to avoid — and what to say instead.
Why the DCF trips people up
The discounted cash flow model looks simple on paper: project free cash flows, discount them back at WACC, add a terminal value. In an interview, the concepts are what matter — bankers want to know you understand why each input drives value.
1. Confusing unlevered and levered free cash flow
Unlevered FCF is available to all capital providers (debt and equity), so you discount it at WACC. Levered FCF is available only to equity holders, so you discount it at the cost of equity. Mixing these up is an instant red flag.
2. Terminal value dominating the model
If more than 75% of your enterprise value comes from the terminal, the DCF is really a terminal-value model with a small NPV attached. Extend the projection period or sanity-check the exit multiple.
3. Using book value for the WACC weights
Use market values of debt and equity for the WACC weights — that's what a marginal investor would pay today. Book values reflect historical accounting decisions.
4. Forgetting mid-year convention
Cash flows arrive continuously, not on December 31st. The mid-year convention discounts each period by 0.5, 1.5, 2.5, ... rather than 1, 2, 3, ... — it typically increases the valuation by 3–5%.
5. Ignoring the terminal-year normalization
The final projected year should reflect a steady state: no one-time working-capital swings, no unusual capex, and a growth rate consistent with the long-term terminal growth.
Practice this out loud
Bankers can smell rote answers. Practice explaining each step in plain English — that's what separates memorized candidates from ones who actually understand the model.