Answers / Valuation
Valuation Interview Questions
DCF, WACC, trading comps, precedent transactions, and LBO valuation — the technical core of every IB and PE interview.
62 questions · model answers · common mistakes
Enterprise Value & Equity Value
- Walk me through the Enterprise Value bridge.
- Why can't you use Equity Value / EBITDA?
- A company has $100m face value of in-the-money convertible bonds (conversion price $20, current share price $30). How should you treat the convertible in the enterprise-value bridge? Walk through the calculation.
- How do you incorporate a company's excess cash and non-operating assets into a valuation?
- What is the correct treatment of minority interest in Enterprise Value and valuation multiples?
- A company has a market cap of $500M, total debt of $200M, cash of $50M, and 10 million shares outstanding. It also has 1 million in-the-money stock options with an exercise price of $20. The current stock price is $50. What is the diluted Enterprise Value?
- How do you treat an underfunded pension deficit in the EV-to-equity bridge, and what's the subtlety on tax?
- Explain the treasury stock method for diluted shares and when you'd use the if-converted method instead.
Comparable Company Analysis
- Which valuation method typically gives the highest value?
- How do you determine the appropriate peer group?
- Why do we use EBITDA as a proxy in valuation?
- Why is the median preferred over the mean for multiples?
- How do you handle different fiscal year-ends in a comps analysis?
- How do you adjust EBITDA for a comp analysis?
- When valuing a company with significant operating leases, how should you adjust the EV/EBITDA multiple to make it comparable to a peer that owns its assets? Walk through the steps.
- A company has a P/E ratio of 20 and an EV/EBITDA multiple of 12. The company has no debt and no cash. What is the effective tax rate embedded in these multiples?
- Which multiple is most appropriate for valuing a capital-intensive company with high depreciation?
- When performing a comparable company analysis, you find that the target company has significantly higher growth than its peers. How do you adjust the multiples?
- How do you present a football field to a board, and how do you handle methods that disagree widely?
- How should you value a cyclical company using multiples, and why is a trough or peak LTM multiple misleading?
- How do you build a clean comparable set, and what adjustments make peers truly comparable?
Advanced Valuation Topics
- How do you value a company with no revenue?
- Explain accretion/dilution analysis.
- How would you value a company in a cyclical industry?
- What is the most appropriate valuation methodology for a company with significant intangible assets but no current revenue, such as a biotech startup in the pre-clinical stage?
- When calculating WACC for a company with multiple divisions in different countries, what is the correct approach?
- How does a private equity buyer use an LBO to set the maximum price it can pay, and why is this a valuation floor?
- How do net operating loss carryforwards (NOLs) enter a valuation, and why don't you just deduct them like net debt?
- What is a discount for lack of marketability (DLOM), when does it apply, and how is it typically quantified?
- Should synergies be included in a standalone valuation, and how does that interact with what a buyer should pay?
- What is a premium-paid analysis, and how does it complement a DCF and trading comps in a takeover?
- When is an asset-based (net asset / liquidation) valuation the most relevant approach, and what's its limitation?
- When does a DCF/NPV understate value, and how do real options capture what it misses?
- Why don't you value a bank or insurer with a standard EV/EBITDA or unlevered DCF, and what do you use instead?
DCF Analysis
- What happens to the DCF value if you increase WACC by 1%?
- How do you calculate Beta for a private company?
- Should you use mid-year or year-end convention in a DCF?
- How do you handle negative cash flows in a DCF?
- What discount rate would you use for a highly leveraged company?
- A company has negative working capital because it collects cash from customers upfront but pays suppliers later. How does this affect your DCF valuation, and what trap must you avoid when projecting free cash flows?
- When valuing a private company using a DCF, how would you estimate the cost of equity if the company has no comparable public peers? The company is highly leveraged with a D/E ratio of 3.0.
- When would you use a DCF valuation as the primary method over comparable company analysis?
- How do you calculate Free Cash Flow to the Firm (FCFF) from scratch?
- What is the difference between the Gordon Growth Model and the Exit Multiple Method for terminal value?
- How should stock-based compensation be treated in unlevered free cash flow, and why is adding it back as a non-cash item a trap?
- How would you estimate the cost of equity for a small private company using the build-up method, and why add a size premium?
- Walk me through unlevering and relevering beta (the Hamada adjustment) and why you do it when using comparable companies.
- How do you incorporate country risk into the discount rate for an emerging-market DCF, and what are the pitfalls?
- How do you derive the implied perpetuity growth rate from an exit-multiple terminal value, and why is it a useful check?
- Should WACC weights use target or current capital structure, and market or book values — and why?
- What is a three-stage DCF with a fade period, and when is it more appropriate than a simple two-stage model?
- What is a reverse DCF, and how do you use it to test whether a stock's price is justified?
German Valuation Standards
- How does IDW S1 differ from a standard DCF?
- Explain the Ertragswertverfahren.
- How does the tax adjustment work in IDW S1?
- What changed in the IDW ES 1 n.F. (2024 update)?
- How do you handle non-betriebsnotwendiges Vermögen (non-operating assets)?
- Why does the IDW S1 Ertragswertverfahren discount flows to equity holders directly, and how does the Tax-CAPM differ from a standard CAPM cost of equity?
- What is the Wachstumsabschlag in the IDW S1 terminal value, and why is it often below the inflation rate?
- Distinguish objektivierter Unternehmenswert, subjektiver Entscheidungswert, and Verkehrswert in IDW S1, and when each is used.
- Why does the IDW S1 Ertragswert method model the retention and reinvestment of earnings (Thesaurierung) explicitly, and how does it affect value?
- What is a Spruchverfahren, and what role does it play in challenging an appraised company value in Germany?
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