Investment Banking DCF Case Study

What a DCF Case Tests in an Interview

A discounted cash flow, or DCF, values a business as the present value of the cash it is expected to generate. In an interview, a DCF case checks whether you can carry that idea through a full set of numbers under time pressure, usually with some inputs given and the rest left for you to work out. Interviewers like it because it exercises accounting, valuation, and judgment in a single exercise.

The Framework Behind Every DCF

Every DCF follows the same sequence. Project revenue and EBITDA over a forecast period, typically five years. Convert EBITDA into unlevered free cash flow. Estimate terminal value with either an exit multiple or a perpetuity growth rate. Discount the cash flows and the terminal value back to today at the WACC. Add everything up for enterprise value, then subtract net debt to reach equity value.

Unlevered Free Cash Flow = NOPAT + D&A - Capex - Increase in NWC

NOPAT is EBIT multiplied by one minus the tax rate. The cash flow is called unlevered because it ignores interest, which keeps the valuation independent of how the company is financed.

Common Mistakes

• Discounting unlevered free cash flow at the cost of equity. Unlevered cash flow belongs to every capital provider, so WACC is the matching discount rate.
• Leaving terminal value undiscounted. It is calculated at the end of the final forecast year, so it takes the same discount factor as that year's cash flow.
• Treating an increase in net working capital as a source of cash. Growth ties cash up in receivables and inventory, so it reduces free cash flow.
• Stopping at enterprise value when the question asks for equity value. Subtract debt and add cash to finish the bridge.

Interview Tips

Say your assumptions out loud before you calculate, and keep a clean table so the interviewer can follow your numbers. Terminal value usually makes up well over half of enterprise value, so expect a follow-up on how the result changes when WACC or the exit multiple moves. This Medium case is built around exactly that conversation. It follows Summit Widget Company, which has $120M of revenue and a 20% EBITDA margin, and asks you to judge which assumptions matter most.

The medium version of this case builds on the basic DCF mechanics by introducing a more judgmental review of the assumptions driving the valuation.

The goal is still to project Summit's operating performance, calculate unlevered free cash flow, estimate terminal value, and discount those cash flows back to present value. The additional challenge is understanding which assumptions matter most and whether the resulting valuation is reasonable.

In this case, Summit Widget Company generated $120.0 million of revenue and $24.0 million of EBITDA in 2024, representing a 20.0% EBITDA margin. The company also has $8.0 million of cash, $18.0 million of debt, and $14.4 million of net working capital.

The base case uses a 10.5% WACC and a 10.0x terminal EBITDA multiple. The case also provides low and high sensitivity inputs around WACC, the terminal multiple, revenue growth, and margin expansion.

1. Project Revenue

Start with Summit's 2024 revenue of $120.0 million.

The projected growth rates are 7.0% in 2025E, 6.0% in 2026E, 5.0% in 2027E, 4.0% in 2028E, and 3.0% in 2029E.

For 2025E, revenue is $120.0 million × 1.07 = $128.4 million.

For 2026E, revenue is $128.4 million × 1.06 = approximately $136.1 million.

Continuing this process produces projected revenue of approximately $142.9 million in 2027E, $148.6 million in 2028E, and $153.1 million in 2029E.

The forecast assumes Summit continues growing, but at a gradually declining rate over the projection period.

2. Project EBITDA

The EBITDA margin expands from 20.0% in 2024 to 20.5% in 2025E and then reaches 21.0% from 2026E through 2029E.

Projected EBITDA is calculated as revenue multiplied by the EBITDA margin.

For 2025E, EBITDA is $128.4 million × 20.5% = approximately $26.3 million.

For 2026E, EBITDA is $136.1 million × 21.0% = approximately $28.6 million.

The same calculation produces EBITDA of approximately $30.0 million in 2027E, $31.2 million in 2028E, and $32.1 million in 2029E.

This increase is driven by both revenue growth and modest margin expansion.