Valuation
Valuation interview questions
The three methodologies, which one gives the highest value, and the enterprise-versus-equity distinction that catches more candidates than anything else.
Valuation questions are mostly about judgement rather than arithmetic: which tool fits which situation, and what each one is actually measuring.
What are the three main valuation methodologies?
The answer
“Comparable companies — value the business against the trading multiples of similar public companies. Market-based, current, but it inherits whatever mood the market is in.
Precedent transactions — what acquirers have actually paid for similar businesses. Reflects real prices, but includes a control premium and the market conditions of the time.
DCF — the present value of projected cash flows. The only intrinsic method, independent of market sentiment, but entirely dependent on your assumptions.”
You might add a fourth for completeness: an LBO analysis, which gives a floor value — the most a financial sponsor could pay and still hit its return hurdle.
Which gives the highest valuation?
Usually precedent transactions, because acquirers pay a control premium for the right to run the business and capture synergies. Comparables typically sit below that, since they reflect minority stakes trading in the open market. A DCF can land anywhere — it is driven by your assumptions rather than the market.
Say “usually”. An interviewer asking this often wants to see whether you will state a rule as though it were a law.
Enterprise value versus equity value
The distinction that trips up more candidates than any other.
- Equity value (market cap) is what the shareholders own: share price times diluted shares.
- Enterprise value is the value of the whole operating business, to everyone who funded it: equity value plus debt, minus cash, plus minority interests and preferred stock.
Cash is subtracted because if you bought the company you would get the cash back — it effectively reduces the purchase price. The practical rule: metrics before interest (EBIT, EBITDA, revenue) pair with enterprise value; metrics after interest (net income, EPS) pair with equity value. Pairing EV with net income is a classic error.
Why EV/EBITDA rather than P/E?
EV/EBITDA is capital-structure neutral and ignores differences in tax and depreciation policy, so it compares the underlying operating businesses rather than their financing choices. P/E is distorted by leverage: two identical businesses with different debt loads will show different P/Es. P/E is still the right tool when comparing companies with similar capital structures, and for banks, where interest is the business.
What makes a good comparable?
Similar industry, similar size, similar growth and margin profile, similar geography. Three genuinely comparable companies beat fifteen loose ones. If asked how you would build the set, say you would start with the target’s own peer disclosures and equity research coverage, then narrow on financial profile — that is how it is actually done.
The traps
- Pairing enterprise value with a post-interest metric like net income.
- Forgetting that a DCF produces enterprise value, not equity value, until you bridge.
- Claiming precedents are “always” highest rather than usually.
- Describing market cap as the value of the company. It is the value of the equity.
Now answer them yourself
Real questions from the Basis curriculum, with the explanation after each one. No account needed.
Common follow-ups
What are the three main valuation methodologies?
Which valuation method gives the highest value?
What is the difference between enterprise value and equity value?
Why use EV/EBITDA instead of P/E?
Why do you subtract cash to get enterprise value?
Drill this properly
Basis teaches the concept first, then tests it — 98 lessons and 449 questions, free in your browser. The Career Accelerator adds DCF, M&A and LBO modules built for front-office interviews.
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