Free Cash Flow Interview Questions

Free sample from the Deskcraft question bank

Built from conversations with hundreds of investment bankers about what they ask in interviews. Our sources

Free cash flow is the number a DCF is built on, and what candidates get wrong is rarely the formula: it is why you start from EBIT rather than net income, or what working capital is doing in there. These questions from the Deskcraft bank walk the full build, unlevered and levered, and the trap in each step.

1. How do you calculate unlevered free cash flow?

Model answer

Start with EBIT and tax it (EBIT times one minus tax) to get NOPAT, add back non-cash D&A, subtract capex, and subtract the increase in net working capital. It is unlevered because it is before interest, representing cash available to all capital providers, both debt and equity.

2. A company is profitable but keeps running out of cash. How is that possible?

Model answer

Profit is accrual-based; cash is not. Common causes: heavy working-capital build (receivables and inventory growing with sales — revenue booked, cash not collected), large capex (hits cash, only depreciation hits the IS), debt principal repayments (not on the IS), or growth outpacing financing. Classic in fast-growing businesses: each new order consumes cash today for profit recognized later.

3. How do stock buybacks and dividends show up on the cash flow statement?

Model answer

Both are financing outflows: dividends paid and share repurchases reduce financing cash flow. They return cash to shareholders and do not touch the income statement, though buybacks reduce the share count and therefore affect EPS.

4. How do you get from enterprise value to equity value per share in a DCF?

Model answer

Subtract net debt, plus any preferred stock and minority interest, from enterprise value to reach equity value, then divide by the fully diluted shares outstanding to get value per share.