The intuition behind a DCF

A discounted cash flow analysis can feel like a wall of assumptions, but the intuition is simple: a company is worth the cash it will generate in the future, with each future dollar worth less than a dollar today because of time and risk.

The method has three moving parts. First, project the company's free cash flows over an explicit forecast period. Second, estimate a terminal value for the cash flows beyond that horizon. Third, discount both back to the present at a rate that reflects how risky those cash flows are.

For an unlevered DCF you discount cash flows available to all investors at the weighted average cost of capital, which produces enterprise value. Subtract net debt and you arrive at equity value. Keeping straight which cash flow pairs with which discount rate is the detail interviewers test.

Because so much of the value sits in the terminal value, small changes in the growth or discount-rate assumption move the answer a lot. Acknowledging that sensitivity is part of showing you understand the tool's limits.