Top 25 Valuation Interview Questions With Answers (Must Know!)

11/26/23, 7:47 PM Top 25 Valuation Interview Questions with Answers (Must Know!
Valuation Interview Questions

and Answers
Article by Reviewed by
Sayantan Mukhopadhyay Dheeraj Vaidya, CFA, FRM

In this Valuation Interview Questions and Answers, you will find the top 25 frequently asked
questions in valuation covered from basic, advanced to application-oriented questions with
answers that will help you crack the most difficult aspect of your valuation interview with
zeal and confidence.
If you want to crack a valuation interview, you better be on your toes and prepare as much
as you can; nowadays, you need to go both depth and breadth to answer interview
questions.
Here we take up the top 25 valuation interview questions often asked in valuation
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interviews. They are by no way a substitute for your “preparation”; however, this guide will
help you direct your attention to the right things.
https://www.wallstreetmojo.com/valuation-interview-questions/ 1/19
11/26/23, 7:47 PM Top 25 Valuation Interview Questions with Answers (Must Know!)
Let’s get started. We have divided these top 25 valuation interview questions into three
categories.
Table of contents

Valuation Interview Questions – Basics
#1 – What is Free Cash Flow to Firm?
#2- What is Free Cash Flow to Equity?
#3 – What is Dividend Discount Model?
#4 – What is the Difference between Enterprise value and equity value?
#5 – What is the difference between trailing PE and forward PE?
#6 – What are the most common multiples used in valuation?
#7 – How would you present these valuation methodologies to investors?
#8 – What are the three most used methodologies of valuation, and how
would you rank them?
#9 – Other than these three, what are the other methodologies? Give a
brief.
#10 – What is precedent transactional analysis?
#11 – Are there any factors through which you can choose comparable
companies?
Valuation Interview Questions – Application
#12 – How do you value a bank?
#13 – What are some examples of industry-specific multiples?
#14 – When would you use the sum of the parts?
#15 – When would you use a liquidation valuation & when liquidation
valuation will produce the highest value?
#16 – In the case of free cash flow multiples, what would you use – equity
value or enterprise value?
Valuation Interview Questions – Advanced
#17 – Which is Better PE or EV To EBITDA
#18 – How do you value Box?
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#19 – Can Terminal Value be Negative?
#20 – When would you not use a DCF in valuation?

#21 – Would an LBO or DCF give higher valuation? Why?
#22 – Let’s say that a company has no profit and no revenue. How would
you value that company?
#23 – How would you value a mango tree?
#24 – What are the flaws with public company comparables?
#25 – How would you value a private company?
Valuation Interview Questions and Answers Video
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Valuation Interview Questions – Basics

Let us have a look at these basic valuation interview questions with answers.
#1 – What is Free Cash Flow to Firm?

A company generates cash flows from its operations by selling goods or services. Some of
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its cash goes back into the business to renew fixed assets and for the working capital
requirements. Free cash flow to the firm is the excess cash generated over and above
these expenses. The firm’s free cash flow goes to the debt holders and the equity holders.
FCFF or Free cash flow to the firm is used in DCF financial modeling.
Free Cash Flow to Firm or FCFF Calculation = EBIT x (1-tax rate) + Non Cash Charges +
Changes in Working capital – Capital Expenditure
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Valuation Interview Questions and

Answers in Video
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#2- What is Free Cash Flow to Equity?

FCFE or Free Cash Flow to Equity model is also one of the DCF approaches (along with
FCFF) to calculate the Stock price. FCFE measures how much “cash” a firm can return to its
shareholders and is calculated after taking care of the taxes, capital expenditure, and debt
cash flows.
The FCFE model has certain limitations. For example, it is useful only in cases where the
company’s leverage is not volatile and cannot be applied to companies with changing debt
leverage.
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FCFE Formula = Net Income + Depreciation & Amortization + Changes in WC + Capex

+ Net Borrowings
#3 – What is Dividend Discount Model?

The Dividend Discount Model is based on the understanding that the fair value of a stock
is the present value of all its future dividends.
Here the CF = Dividends.
Some examples of regular dividend-paying companies are McDonald’s, Procter & Gamble,
Kimberly Clark, PepsiCo, 3M, Coca-Cola, Johnson & Johnson, AT&T, Walmart, etc. We can
use the Dividend Discount Model to value these companies.
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source: ycharts
#4 – What is the Difference between Enterprise value

and equity value?
This is one of the most basic interview questions on valuation. Straightforward answer –
Enterprise Value = Market value of operating assets

Equity Value = Market value of shareholders’ equity
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For more details, have a look at Enterprise value vs. Equity Value
#5 – What is the difference between trailing PE and

forward PE?
Trailing PE Ratio uses the Historical EPS, while Forward PE Ratio uses the Forecast EPS. Let
us look at the below example to calculate the Trailing PE vs. forwarding PE Ratio.
Trailing Price Earning Ratio formula = $234 / $10 = $23.4x

Forward Price Earning Ratio formula = $234 / $11 = $21.3x
For more details, have a look at Trailing PE vs. Forward PE
#6 – What are the most common multiples used in

valuation?
It is another basic valuation interview question. There are a few common trading valuation
multiples that are frequently used in valuation –
EV to EBIT
Price to Cash Flow
Enterprise Value to Sales
EV to EBITDA
PEG Ratio
Price to Book Value
PE Ratio
#7 – How would you present these valuation

methodologies to investors? 00:00/01:00
The best way to approach this is to do your homework first. If possible, find out the firm’s
valuation using each methodology and then show it to the investors as a “football field”
chart. It would be best to remember that you should always show a range instead of a
specific number, as one needs to estimate many factors before coming to conclusions.
Learn more about Investment Banking Charts here
#8 – What are the three most used methodologies of

valuation, and how would you rank them?
It is a pretty common question, but it’s often asked. You would say – discounted cash flow
analysis (DCF) Valuation, comparable comp analysis, and precedent transactions are the
three most used methodologies for valuation. The ranking question is tricky. Usually,
precedent transactions are higher than the comparable companies as a control premium is
built into it. In the case of DCF, it can go both ways (highest or lowest) depending on your
assumptions during the calculation.
#9 – Other than these three, what are the other

methodologies? Give a brief.
Other than the above 3, you can talk about the following methodologies –
LBO Analysis: LBO Analysis helps a firm determine how much PE a firm would be able
to pay to hit the “target IRR” (generally, the “target IRR” happens to be in the range of
15-25%).
Sum of the Parts: This has two steps. Firstly, each part is valued separately. And then,
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they are added together.
Liquidation Valuation: The whole idea of Liquidation Value is to imagine that all the
company’s assets are sold off. And then, once the figure comes up, the liabilities are
subtracted from the figure. It is the capital (if at all) equity investors receive.
M&A Premiums Analysis: First, M&A deals are analyzed to determine how much
premium each buyer paid and then utilize the information to determine how much the
company is worth.
Replacement Value: The valuation of replacing the company’s assets would be the
replacement value.
#10 – What is precedent transactional analysis?

In simple words, the precedent transactional analysis is a valuation method that takes the
past transactions of similar companies to value a company.
If we break down this method in a few steps, here are they –
Firstly, similar companies are chosen based on similar features or in a similar industry.
Secondly, the size of the transactions should be similar.
Thirdly, the type of transaction and the features of buyers would be the same.
Fourthly, transactions that happened more recently have been considered more
valuable.
Fifthly, the estimate is being made on the basis of the above factors.
#11 – Are there any factors through which you can

choose comparable companies?
This valuation interview question should be easy to answer. There are exactly three factors
that are used to choose comparable companies.
Firstly, the most important factor is the industry classification. This is most important
because, on the basis of this, the companies can be easily compared at a high level.
Secondly, you need to consider the financial criteria if you want to go more specific.
Under financial criteria, you would look at revenue, EBITDA, EBITDAR, EBIT, etc.
Thirdly, the last you should consider is geography.
Usually, the first factor (industry classification) is used most, and the least used factor is
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geography.
Valuation Interview Questions –

Application
Let us have a look at the application-oriented valuation interview questions (with answers)
#12 – How do you value a bank?

This one is a common valuation interview question. Be sure to answer this correctly.
Banks are primarily valued using Price to Book Value multiple. This is because of the
following reasons –
Banks have assets and liabilities that are periodically marked to market, as it is
mandatory under regulations. So, the Balance Sheet value represents the market value,
unlike other industries where the Balance Sheet represents the historical cost of the
assets/liabilities.
Bank assets include investments in government bonds, high-grade corporate bonds or
municipal bonds, along with commercial, mortgage, or personal loans that are
generally expected to be collectible.
The below graph shows a quick comparison of the Historical Book values of
JPMorgan, UBS, Citigroup, and Morgan Stanley.
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source: charts
#13 – What are some examples of industry-specific

multiples?
This one is another important valuation interview question. Industry-specific multiples vary
as per the industrial factors. Let’s look at four examples –
Real Estate Investment Trusts (REITs): Price / Funds from operations (FFO); Price /
Adjusted Funds from operations (AFFO)
Retail or Airlines: Enterprise Value (EV) / Earnings before interests, taxes, depreciation,
amortization, and rent (EBITDAR)
Technology: EV / Unique Visitors; EV / Page-views
Energy: Price (P) / Net Asset Value (NAV); P / 1 million cubic foot equivalent (MCFE); P /
1 million cubic foot equivalent per day (MCFE / D)
#14 – When would you use the sum of the parts?

The sum of the parts is mostly useful for companies with several divisions unrelated to each
other. For example, if a company has an energy division, consumer finance division,
technology division, and media division, the sum of the parts would be pretty useful.
Let us understand the Sum of the Parts valuation using an example of a large
conglomerate company (ticker MOJO) that operates the following business segments.
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Automobile Segment Valuation – Automobile Segment could be best valued using

EV/EBITDA or PE ratios.
Oil and Gas Segment Valuation – For Oil and Gas companies, the best approach is to
use EV/EBITDA or P/CF or EV/boe (EV/barrels of oil equivalent)
Software Segment Valuation – We use PE or EV/EBIT multiple to value Software
Segment
Bank Segment Valuation – We generally use P/BV or Residual Income Method to
value Banking Sector
E-commerce Segment – We use EV/Sales to value the E-commerce segment (if the
segment is not profitable) or EV/Subscriber or PE multiple
#15 – When would you use a liquidation valuation &

when liquidation valuation will produce the highest
value?
Liquidation valuation is useful when there are any bankruptcy situations. If a company has
a chance to go belly up, liquidation valuation will help understand how much capital
equity investors will get after the debts have been paid off.
Liquidation valuation producing high value is highly unlikely. But if the market is severely
undervaluing assets for a particular reason and the firm has substantial hard assets, it could
be possible. Due to this, the company’s comparable companies and precedent transactions
would generate lower values, and as assets are valued pretty highly, liquidation valuation
will produce a higher value.Liquidation valuation producing high value is highly unlikely. But
if the market is severely undervalued for a particular reason and the firm has
substantialLiquidation valuation producing high value is highly unlikely. But if the market is
severely undervaluing assets for a particular reason and the firm has substantial hard assets
, it could be possible. Due to this, the company’s comparable companies and precedent
transactions would generate lower values, and as assets are valued highly, liquidation
valuation will produce a higher value.
#16 – In the case of free cash flow multiples, what would

you use – equity value or enterprise value?
There are two things to remember here. First, in the case of unlevered free cash flow, you
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need to use enterprise value.
Below are the enterprise value multiples –
And, in the case of levered free cash flow, you should use equity value. Here’s why. In
unlevered free cash flow, interest is excluded. Thus, money is available to investors. But in
the case of levered free cash flow, interest is included; thus, it is only available to equity
holders.
Below is the list of Equity Value Multiples –
Valuation Interview Questions –

Advanced
Let us now look at some of the advanced Valuation Interview Questions.
#17 – Which is Better PE or EV To EBITDA

This one is a tricky valuation interview question. Most people use the PE ratio as the primary
valuation tool. However, there are several limitations of PE Ratio due to which EV to EBITDA
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is considered a better valuation multiple.
PE Ratio does not consider balance sheet risk. The fundamental position of the
company is not reflected correctly in PE Multiple.
The different debt-to-equity structures can significantly affect the company’s earnings.
Earnings can vary widely for companies with debt due to a component of Interest
Payments affecting the Earnings Per Share.
It cannot be used when earnings are negative. For example, Box Inc. You cannot simply
find PE Multiple for such unprofitable companies. One must use normalized earnings or
forward multiples in such cases.
Earnings are subject to different accounting policies. It can be easily manipulated by
management.
#18 – How do you value Box?
Have a look at the above Box IPO Financial model with forecasts. We note that BOX is
making losses not only at the Operating but also at the Net Income Level. How do you
value such companies that grow fast but are free cash flow negative?
In such cases, we cannot apply valuation multiples like PE ratio (due to negative earnings),
EV to EBITDA (if EBITDA is negative), or DCF approach (when FCFF is negative). The
valuation tool that comes to our rescue is EV to Sales!
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#19 – Can Terminal Value be Negative?

Another tricky valuation interview question. The answer is theoretically YES, Practically NO!
Theoretically, this can happen when the Terminal value is calculated using the perpetuity
growth method.
In the formula above, if we assume

+ [Cost of Debt * % of Debt * (1-Tax Rate)]”
url=”https://www.wallstreetmojo.com/weighted-average-cost-capital-wacc/”]WACC
< growth rate, then the Terminal Value derived from the formula will be Negative. It is very
difficult to digest as a high-growth company is now showing a negative terminal value
because of the formula used. However, this high growth rate assumption is incorrect. We
cannot assume that a company will grow at a very high rate until it is infinite.
For more details, please have a look at this detailed Guide to Terminal value
#20 – When would you not use a DCF in valuation?

In two particular situations, you should never use DCF –
Firstly, if the firm has unpredictable or unsteady cash flows;

Secondly, when debt and working capital serve a completely different role altogether.
For example, DCF is not used to value banks as banks and financial institutions don’t
reinvest their debt and working capital.
#21 – Would an LBO or DCF give higher valuation? Why?

Usually, DCF will give a higher valuation. Unlike DCF, in LBO analysis, you won’t get any cash
flow between year one and the final year. So the analysis is done based on terminal value
only. In the case of DCF, the valuation is done both based on cash flows and the terminal
values; thus, it tends to be higher.
Moreover, in LBO, an expected IRR (Internal Rate of Return) is set up, and then the
valuation is done.
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#22 – Let’s say that a company has no profit and no revenue.
How would you value that company?
The simplest way to look at it is to say that the company’s valuation would be done by using
other metrics. There is no profit and no revenue, and there won’t be any cash flow. Thus,
using creative multiples that will go with the inherent nature of the business will do the
trick.
#23 – How would you value a mango tree?

It may seem to be a tricky question, but it’s not if you think it through.
When you are asked this question, you would say that the mango tree would be valued as a
company can be valued – first by glancing toward the comparable mango trees and what
they are worth (i.e., relative valuation) and then finding out the value of the mango tree’s
cash flows (i.e., intrinsic valuation).
#24 – What are the flaws with public company

comparables?
There may be various flaws with public company comparables. But the following three
stands out –
The stock market doesn’t have a fixed way of reacting. It reacts impulsively to the
events or happenings in the market. So, it is very difficult to predict the stock market’s
reaction on a given day. Thus, the factors you use may not help you at all.
A 100% comparison of one company with another is never possible. There will always
be room for error.
The smallest companies have the tiniest stocks. And these stocks may not always reflect
the actual value of the company.
#25 – How would you value a private company?

Valuing a private company is slightly different than valuing a public company. Of course,
you will use the comparables, precedent transactions, DCF, but here are a few differences –
First of all, you need to think about the liquidity of the private company. Naturally,
private companies wouldn’t be as liquid as public companies. Thus, while valuing the
private company, the discounting rate would increase.
It wouldn’t be possible to use future share price analysis; because there would be none.
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DCF becomes very difficult as there is no beta in the case of a private company.
In the case of a private company, the enterprise value would be taken into account.
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11/26/23, 7:47 PM Top 25 Valuation Interview Questions with Answers (Must Know!

Valuation Interview Questions

Valuation Interview Questions

Valuation Interview Questions

#20 – When would you not use a DCF in valuation?

Valuation Interview Questions – Basics

#1 – What is Free Cash Flow to Firm?

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Learn More RATING

Valuation Interview Questions and

#2- What is Free Cash Flow to Equity?

FCFE Formula = Net Income + Depreciation & Amortization + Changes in WC + Capex

#3 – What is Dividend Discount Model?

Here the CF = Dividends.

#4 – What is the Difference between Enterprise value

Enterprise Value = Market value of operating assets

#5 – What is the difference between trailing PE and

Trailing Price Earning Ratio formula = $234 / $10 = $23.4x

For more details, have a look at Trailing PE vs. Forward PE

#6 – What are the most common multiples used in

#7 – How would you present these valuation

Learn more about Investment Banking Charts here

#8 – What are the three most used methodologies of

#9 – Other than these three, what are the other

#10 – What is precedent transactional analysis?

If we break down this method in a few steps, here are they –

#11 – Are there any factors through which you can

Valuation Interview Questions –

#12 – How do you value a bank?

#13 – What are some examples of industry-specific

#14 – When would you use the sum of the parts?

Automobile Segment Valuation – Automobile Segment could be best valued using

#15 – When would you use a liquidation valuation &

#16 – In the case of free cash flow multiples, what would

Below are the enterprise value multiples –

Below is the list of Equity Value Multiples –

Valuation Interview Questions –

#17 – Which is Better PE or EV To EBITDA

#18 – How do you value Box?

#19 – Can Terminal Value be Negative?

In the formula above, if we assume

#20 – When would you not use a DCF in valuation?

Firstly, if the firm has unpredictable or unsteady cash flows;

#21 – Would an LBO or DCF give higher valuation? Why?

#23 – How would you value a mango tree?

#24 – What are the flaws with public company

#25 – How would you value a private company?

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