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Valuation Interview Questions and Answers

Questions

1. Walk me through how you would value a company.

- Three main approaches:

1. DCF (intrinsic)
2. Comparable Company Analysis (market multiples)
3. Precedent Transactions (M&A multiples)

- Usually start with DCF as the most β€œtheoretical,” then cross-check with multiples.

2. Why do we use enterprise value multiples (EV/EBITDA) instead of price multiples (P/E) when valuing a company?

- EV/EBITDA is capital-structure neutral β†’ compares companies regardless of debt/equity mix.
- P/E is distorted by leverage, non-operating items, and tax rates.

3. When would you use a sum-of-the-parts (SOTP) valuation?

- Conglomerates with distinct business units (e.g., GE, Berkshire Hathaway, Alibaba).
- When a company has non-operating assets (real estate, stakes in other companies).

4. Which is higher: EV/EBITDA or EV/EBIT? Why?

- EV/EBITDA is almost always higher because EBITDA > EBIT (adds back D&A).
- Exception: companies with negative depreciation (rare).

DCF Questions

5. Walk me through a DCF.

- Step-by-step:
1. Project free cash flows (FCF) for 5–10 years
2. Calculate WACC (discount rate)
3. Terminal value (Gordon Growth or Exit Multiple)
4. Discount everything to present
5. Subtract net debt β†’ Equity value

6. How do you calculate unlevered free cash flow (FCF)?

- EBIT Γ— (1 βˆ’ tax rate)

D&A βˆ’ CapEx βˆ’ Ξ”NWC
Other non-cash items

7. How do you calculate WACC?

o WACC = [E/(D+E)] Γ— Re + [D/(D+E)] Γ— Rd Γ— (1 βˆ’ Tc)
o Re = Rf + Ξ² Γ— ERP (sometimes + size premium or country risk)

8. Why do we use mid-year convention in DCF?

- Cash flows are assumed to occur evenly throughout the year, not on the last day.

9. Terminal value: Exit multiple vs. Gordon Growth – which one do you prefer and why?

- Most PE/IB use exit multiple (more market-based).

- Gordon Growth assumes perpetual growth (often too theoretical; growth rates > GDP are unsustainable long-term).

10. If a company’s growth rate is higher than WACC, Gordon Growth formula breaks – what do you do?

- You cannot use a growth rate > discount rate in perpetuity.
- Use a two-stage model or normalize growth to a sustainable rate (2–4%).

Multiples & Comparable Companies

11. How do you choose comparable companies?

- Industry, size (revenue/EBITDA), growth rate, margins, geography, business model.

12. A company trades at 8x EV/EBITDA while peers trade at 12x. Is it undervalued?

- Not necessarily. Could have lower growth, lower margins, higher risk, worse management, etc.

13. Why do precedent transactions usually have higher multiples than trading comps?

- Control premium (typically 20–40%).

14. Football field valuation – what is it?

- Chart showing the range of values from different methodologies (DCF, comps, precedents, LBO, etc.).

15. Walk me through a quick LBO model.

- Entry multiple β†’ Debt/Equity raised β†’ Project financials β†’ Exit at same or higher multiple β†’ Calculate IRR/MOIC.

16. What drives returns in an LBO?

- Entry multiple (lower = better)
- De-levering (paying down debt)
- EBITDA growth
- Exit multiple expansion

17. What is a reasonable IRR for private equity?

- Typically 20–30%+ gross IRR (depends on vintage, strategy, fund size).

Brain Teasers & Quick Math

18. If a company does $100M revenue growing 10% forever, 30% EBITDA margin, WACC 10%, net debt $50M – ballpark value?

- EBITDA = $30M β†’ Perpetual FCF β‰ˆ $21M (assuming CapEx = D&A)
- EV = $21M / 10% = $210M β†’ Equity = $160M

19. If depreciation = CapEx and no change in NWC, what is FCF as % of EBITDA?

- FCF = EBIT(1-t) + Dep – CapEx – Ξ”NWC β‰ˆ EBITDA(1-t)
- So roughly 70% (assuming 30% tax rate).

20. If interest rates rise, what happens to valuation multiples?

- Multiples compress (higher discount rates β†’ lower present value).

Bonus Hard Questions

β€’ β€œWhich valuation method would give the highest value for a high-growth tech company vs. a mature utility?”

- Tech β†’ DCF (captures growth); Utility β†’ Multiples (stable cash flows).

β€’ β€œHow would you value a biotech with no revenue but a drug in Phase III?”

- Risk-adjusted NPV (rNPV) of future cash flows from the drug.

β€’ β€œHow does a $1 increase in depreciation affect valuation in a DCF?”

- Tax shield (+$0.40 if 40% tax), but reduces EBIT β†’ net ~$0.40 increase in FCF.

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