Technical valuation questions are at the heart of investment banking interviews. Here is how to master the most frequent questions and impress your recruiters.
💼 Essential Preparation: Before the interview, check our guide on effectively preparing for your finance interview.
The 3 Valuation Methods to Master
1. DCF (Discounted Cash Flow)
Sample Question: "Explain how to do a DCF valuation from A to Z."
Structured Answer: A DCF values a company by discounting its future cash flows. Steps: project Free Cash Flows for 5-10 years, calculate the terminal value (using the multiple method or the perpetual growth method), determine the WACC, discount all flows to the present to obtain the Enterprise Value, then subtract net debt to get the Equity Value.
Key Formula: FCF = EBITDA - Capex - Change in Working Capital - Taxes
2. Comparable Companies (Trading Comps)
Sample Question: "Which multiples do you use to value a company?"
Essential Multiples: EV/EBITDA (most commonly used), EV/Revenue (for growth companies), P/E (Price to Earnings), EV/EBIT, P/B (Price to Book).
Methodology: Identify 5-10 comparable companies (same sector, similar size, geography), calculate their multiples, apply the median to your target, and adjust if necessary.
3. Precedent Transactions (Transaction Comps)
Sample Question: "What is the difference between Trading Comps and Transaction Comps?"
Answer: Trading Comps = multiples of currently listed public companies. Transaction Comps = multiples paid during past acquisitions (these typically include a 20-30% control premium).
Common Technical Questions
"What happens if the WACC increases?"
Answer: If the WACC increases, the company's value decreases. The WACC is the discount rate: the higher it is, the less future cash flows are worth today.
"What is the difference between Enterprise Value and Equity Value?"
Exact Answer: EV = total value of the company (debt + equity - cash). Equity Value = value of the equity alone. Formula: Equity Value = EV - Net Debt.
"Why use EBITDA instead of Net Income?"
Answer: EBITDA removes the impact of financing structure (interest), taxation, and depreciation/amortization policies. It allows for comparing companies regardless of their capital structure or tax environment.
📊 Strengthen your foundation: Master the essential Excel skills for financial modeling.
Questions on WACC
"How do you calculate the WACC?"
Formula: WACC = (E/V × Re) + (D/V × Rd × (1-Tc))
- E = Equity Value
- D = Debt
- V = E + D
- Re = Cost of Equity (CAPM)
- Rd = Cost of Debt
- Tc = Corporate Tax Rate
"How do you calculate the Cost of Equity?"
CAPM: Re = Rf + β × (Rm - Rf)
- Rf = Risk-free rate (e.g., 10-year US Treasury yield ~4%)
- β = Beta (volatility vs. the market)
- Rm - Rf = Market risk premium (~6-7%)
LBO (Leveraged Buyout) Questions
"Walk me through an LBO model."
Structure: A PE fund buys a company using 30-40% equity and 60-70% debt. The company generates cash flows that repay the debt over 5-7 years. Upon exit, the fund sells the company and achieves an IRR of 20-25%.
Key Factors: EBITDA growth, deleveraging (debt repayment), and multiple expansion at exit.
IRR Calculation: If initial investment is $100M and exit is $250M in 5 years → IRR ≈ 20%.
Questions on Financial Statements
"If revenue increases by $10, what happens across the 3 statements?"
Complete Answer:
- Income Statement: Revenue +$10, operating margin depends on the sector (say 30%), net income +$6 (after 40% tax).
- Balance Sheet: Cash +$6 (Asset), Retained Earnings +$6 (Equity/Liability).
- Cash Flow Statement: Net Income +$6.
"How are the 3 financial statements linked?"
Net income from the Income Statement flows into Retained Earnings on the Balance Sheet and is the starting point for the Cash Flow Statement. The change in cash from the Cash Flow Statement is reflected on the Balance Sheet.
Questions on Multiples
"EV/EBITDA of 10x, what does that mean?"
The company is worth 10 times its annual EBITDA. If EBITDA = $50M, then EV = $500M. It acts like a "payback period": how many years of EBITDA to recover the investment.
"Typical EV/EBITDA multiples by sector?"
- Tech/SaaS: 15-25x
- Industrial: 8-12x
- Retail: 6-10x
- Banks: Usually 8-10x P/E rather than EV/EBITDA.
Accretion/Dilution Questions
"What is accretion/dilution?"
In an acquisition, if the acquirer's EPS (Earnings Per Share) increases after the deal = accretion. If it decreases = dilution.
Key Factor: Acquirer's P/E vs. the P/E paid for the target. If an acquirer with a P/E of 20x buys a target at 15x → it is accretive.
💡 Intensive Practice: Have your resume optimized for ATS to land these interviews.
Behavioral Questions Related to Valuation
"Which valuation method do you prefer?"
Good Answer: "No single method is sufficient. I use all three (DCF, Comps, Transactions) to arrive at a valuation range (football field). The DCF gives the intrinsic value, Comps reflect current market sentiment, and Transactions show the control premiums paid."
"You disagree with your analyst on a valuation, what do you do?"
Professional Answer: I would ask to see their assumptions in detail, present my methodology, and perform a sensitivity analysis to see where the discrepancy lies. If we still disagree, I would escalate it to a VP or Director for guidance.
Practice Exercise: Interview Case
Prompt: "Company A (EBITDA $100M, Debt $300M, Cash $50M) is valued at a 10x EV/EBITDA multiple. Calculate the Equity Value."
Solution:
- EV = 10 × $100M = $1,000M
- Net Debt = $300M - $50M = $250M
- Equity Value = $1,000M - $250M = $750M
Checklist Before the Technical Interview
- [ ] Master the 3 valuation methods (DCF, Comps, Transactions).
- [ ] Know the WACC and CAPM formulas by heart.
- [ ] Know how to link the 3 financial statements.
- [ ] Understand Enterprise Value vs. Equity Value.
- [ ] Be able to calculate a basic LBO.
- [ ] Know typical multiples by sector.
- [ ] Be able to explain accretion/dilution.
- [ ] Have completed 10+ practice exercises.
Conclusion
Mastering technical valuation questions requires 50-100 hours of intensive practice. It's not just theory: you must be able to build a DCF from scratch in 30 minutes.
The 3 Pillars:
- Solid Theory: Understanding every formula and its meaning.
- Excel Practice: Building complex models.
- Clear Communication: Explaining complex concepts simply.
Recruiters are testing both your analytical rigor and your ability to structure your thoughts. Prepare methodically, and you will succeed.