How to Answer: Have you heard of DCF method? If so, what is it and what does it measure?
Advice and answer examples written specifically for a Finance job interview.
22. Have you heard of DCF method? If so, what is it and what does it measure?
How to Answer
In finance, discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset using the concepts of the time value of money. All future cash flows are estimated and discounted by using cost of capital to give their present values. The DCF is a valuation tool used to find the intrinsic value.
If you are new in accounting and finance career, you might get asked basic terminology questions and how its relevant to a business in the interview. The reason this is done, is to ensure the person understands the concept.
Written by Bobbi Witt on July 19th, 2018
Entry Level
"Discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analyses use future free cash flow projections and discounts them, using a required annual rate, to arrive at present value estimates."
Written by Bobbi Witt
Answer Example
"Calculating the sum of future discounted cash flows is the gold standard to determine how much an investment is worth. DCF is a valuation tool used to find the intrinsic value and then begin running them through the steps: calculate FFCF (explaining what it is), calculate the WACC (also explaining what it is), discount the FFCF using the WACC to get to the present value, calculate the terminal value (explain what it is), discount the terminal value using the WACC to get to the PV and then add this figure to the PV for the discounted FFCF. Then depending on how it's going I may finish up with the benefits of using a DCF analysis and then briefly mention alternative valuation tools."
Written by Bobbi Witt