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What is Reverse DCF?

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How do you answer this real life investment banking interview question -

What is reverse DCF?

Most students can hardly answer walk me through a DCF question in an interview correctly.

However, one of my students got asked the above question on reverse DCF in his interview last year.

Thought I should write a post on this to explain to students how challenging some of the technical questions can be.

In brief, reverse DCF is an exercise in which the analyst uses the current share price of the company to reverse engineer key assumptions of the DCF i.e. growth in FCFF, LT growth in FCFF and WACC from a model.

Based on these numbers derived from reverse engineering, an analyst can then gauge if the market is being too optimistic or pessimistic about some of the key components that drive valuation of the stock.

If you would like to learn about these basic and advanced valuation techniques then check out our 8 weeks investment banking training program.

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