10/2/2019 Top 25 Valuation Interview Questions with Answers (Must Know!

Valuation Interview Questions and

(https://www.wallstreet
mojo.com/)
Answers

Valuation Tutorials  (https://www.wallstreetmojo.com/valuation-methods/)

 Valuation  (https://www.wallstreetmojo.com/economic-value-added-
eva/)
Interview Prep 

Valuation Interview
 Questions and Valuation Interview Questions
Answers 

Valuation Methods
In this Valuation Interview Questions and Answers, you will nd the
(Top 5)
top 25 frequently asked questions in valuation covered from basic,
 (https://www.wallstre
etmojo.com/valuation- advanced to application-oriented questions with answers that will
methods/)
help you crack the most dif cult aspect of your valuation interview
Valuation Analyst
(https://www.wallstre with zeal and con dence.
 etmojo.com/valuation-
analyst/) If you want to crack a valuation interview, you better be on your toes
Top 10 Qualitative
and prepare as much as you can; because now-a-days you need to go
Factors in Valuation
both depth and breadth for answering interview questions.
 (https://www.wallstre
etmojo.com/qualitativ
e-factors-valuation/) Having said that, here we take up the top 25 valuation interview
7 Best Valuation
questions which are often asked in valuation interviews. They are by
Books
(https://www.wallstre no way a substitute of your “preparation”; however, this guide will

 etmojo.com/best- help you direct your attention to the right things.

valuation-books/)

 Valuation Basics Let’s get started. We have divided these top 25 valuation interview

(19 ) questions into three category

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10/2/2019 Top 25 Valuation Interview Questions with Answers (Must Know!)

(19+)  questions into three category

(https://www.wallstreet
(https://www.wallstreet
mojo.com/category/valu
Valuation Interview Questions – Basics
mojo.com/)
ation/valuation- Valuation Interview Questions – Application

principles) Valuation Interview Questions – Advanced

 Discounted Cash
Flows (39+)    Valuation interview Questions –
(https://www.wallstreet
 Basics
mojo.com/category/valu

ation/discounted-cash-
Let us have a look at these basic valuation interview questions with
ow)
answers.
 Valuation Multiples

(17+) 

(https://www.wallstreet
#1 – What is Free Cash Flow to Firm?
mojo.com/category/valu FCFF or Free cash ow to the rm
ation/valuation- (https://www.wallstreetmojo.com/free-cash- ow- rm-fcff/) is used in
multiples) DCF nancial modeling (https://www.wallstreetmojo.com/ nancial-

 Other Valuation modeling/). A company generates cash ows from its operations by

Tools (3+)  selling goods or services. Some of its cash goes back into the business
(https://www.wallstreet to renew xed assets and for working capital requirement. Free cash
mojo.com/category/valu ow to  rm is the excess cash generated over and above these
ation/other-valuation- expenses. Free cash ow to rm goes to the debt holders and the
tools) equity holders.

Related Courses
Valuation Course
(https://www.wallstre

etmojo.com/valuation-

course/?btnz=wsm-
blg-rel-crs)
Financial Modeling

https://www.wallstreetmojo.com/valuation-interview-questions/ 2/29
10/2/2019 Top 25 Valuation Interview Questions with Answers (Must Know!)

Course
(https://www.wallstre
(https://www.wallstreet
etmojo.com/ nancial-
mojo.com/)
 modeling-course/?
btnz=wsm-blg-rel-
crs)
Equity Research
Course (https://cdn.wallstreetmojo.com/wp-content/uploads/2014/07/FCFF-
(https://www.wallstre diagram.png)
etmojo.com/equity-
 research-training-
Free Cash Flow to Firm or FCFF Calculation = EBIT x (1-tax rate) +
course/?btnz=wsm-
blg-rel-crs) Non Cash Charges + Changes in Working capital – Capital
M&A Course Expenditure
(https://www.wallstre
etmojo.com/mergers-
 and-acquisitions- Start Your Free Investment Banking Course
course/?btnz=wsm-
Download IB Excel Templates, Accounting, Valuation, Financial Modeling,
blg-rel-crs)
Video Tutorials

Recommended Courses

LBO Modeling Course

(https://www.wallstreetmojo.com/lbo-modeling-course/)
Course on Financial Analyst

(https://www.wallstreetmojo.com/full-access-bundle/)
IB Modeling Training

(https://www.wallstreetmojo.com/investment-banking-
training-course/)

Mergers and Acquisitions Training Course

(https://www.wallstreetmojo.com/mergers-and-

acquisitions-course/)

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10/2/2019 Top 25 Valuation Interview Questions with Answers (Must Know!)

(https://www.wallstreet
mojo.com/)
#2-  What is Free Cash Flow to Equity?
FCFE or Free Cash Flow to Equity model

(https://www.wallstreetmojo.com/fcfe-free-cash- ow-to-equity/) is

also one of the DCF approaches (along with FCFF) to calculate the

Stock price. FCFE measure how much “cash” a rm can return to its

shareholders and is calculated after taking care of the taxes, capital

expenditure and debt cash ows.

FCFE model has certain limitations. For example, it is useful only in

cases where the company’s leverage

(https://www.wallstreetmojo.com/leverage-ratios/) is not volatile and it

cannot be applied to companies with changing debt leverage.

FCFE Formula = Net Income + Depreciation

(https://www.wallstreetmojo.com/depreciation/) & Amortization +

Changes in WC + Capex + Net Borrowings

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10/2/2019 Top 25 Valuation Interview Questions with Answers (Must Know!)

(https://www.wallstreet #3 – What is Dividend Discount Model?

mojo.com/)
Dividend Discount Model  (https://www.wallstreetmojo.com/dividend-

discount-model/)is based on the understanding that fair value

of stock is the present value 

(https://www.wallstreetmojo.com/present-value-factor-pv/)of all its

future dividends.

Here the CF = Dividends.

Some examples of regular dividend-paying

(https://www.wallstreetmojo.com/dividend-payout-ratio/) companies

are McDonalds, Procter & Gamble, Kimberly Clark, PepsiCo, 3M,

CocaCola, Johnson & Johnson, AT&T, Walmart etc. We can use

Dividend Discount Model to value these companies.

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10/2/2019 Top 25 Valuation Interview Questions with Answers (Must Know!)

(https://www.wallstreet
mojo.com/)

source: ycharts (http://go.ycharts.com/wallstreetmojo)

#4 – What is the Difference between

Enterprise value and equity value
(https://www.wallstreetmojo.com/equity-
value/)?
This is one of the most basic interview question on valuation.

Straightforward answer –

Enterprise Value  =  Market value of operating assets

Equity Value       =  Market value of shareholders’ equity

(https://cdn.wallstreetmojo.com/wp-

content/uploads/2014/04/Enterprise-Value-Vs-Equity-Value-

Diagram.png)

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For more details, have a look at Enterprise value vs Equity Value

(https://www.wallstreet
mojo.com/) (https://www.wallstreetmojo.com/equity-value-vs-enterprise-value-

calculate-formula/)

#5 – What is the difference between trailing

PE and forward PE?
Trailing PE Ratio use the Historical EPS, while Forward PE Ratio

(https://www.wallstreetmojo.com/forward-pe-ratio/) uses the Forecast
EPS. Let us look at the below another example to calculate the Trailing
PE vs Forward PE Ratio (https://www.wallstreetmojo.com/trailing-pe-

vs-forward-pe/).

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

(https://www.wallstreetmojo.com/trailing-pe-vs-forward-pe/)

#6 – What are the most common multiples

used in valuation?
This is another basic valuation interview question There are few

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10/2/2019 Top 25 Valuation Interview Questions with Answers (Must Know!)

This is another basic valuation interview question. There are few

common valuation multiples which are frequently used in valuation –

(https://www.wallstreet
mojo.com/)
EV to EBIT (http://www.wallstreetmojo.com/ev-to-ebit/)
Price to Cash Flow (http://www.wallstreetmojo.com/price-to-

cash- ow-ratio/)
Enterprise Value to Sales
(http://www.wallstreetmojo.com/enterprise-value-to-sales-ev-

to-sales-ratio/)
EV to EBITDA (http://www.wallstreetmojo.com/ev-to-ebitda-

multiple-formula/)
PEG Ratio (http://www.wallstreetmojo.com/peg-ratio/)
Price to Book Value (http://www.wallstreetmojo.com/price-to-

book-value-ratio/)
PE Ratio (http://www.wallstreetmojo.com/pe-ratio/)

#7 – How would you present these valuation

methodologies to investors?
The best way to approach this is to do your homework rst. If

possible, nd out the valuation of the rm using each methodology

and then show it to the investors as “football eld” chart. One thing

you need to remember is you should always show a range instead of a

speci c number as one needs to estimate many factors before coming
to the conclusions.

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Related Courses

Financial Modeling Course

(https://www.wallstreetmojo.com/ nancial-modeling-course/?
btnz=wsm-blg-inline-banner1)

Equity Research Course

(https://www.wallstreetmojo.com/equity-research-training-
course/?btnz=wsm-blg-inline-banner1)

M&A Course (https://www.wallstreetmojo.com/mergers-and-

acquisitions-course/?btnz=wsm-blg-inline-banner1)

https://www.wallstreetmojo.com/valuation-interview-questions/ 9/29
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(https://www.wallstreet
mojo.com/)

(https://cdn.wallstreetmojo.com/wp-
content/uploads/2014/07/Floating-Charts.png)

Learn more about Investment Banking Charts

(https://www.wallstreetmojo.com/investment-banking-charts-pe-
charts-pe-band-chart-football- eld-scenario-graphs/) here

#8 – What are the three most used

methodologies of valuation and how you
would rank them?
This is a pretty common question, but it’s often asked. You would say
– discounted cash ow analysis (DCF) Valuation

(https://www.wallstreetmojo.com/dcf-discounted-cash-
ow/), comparable comp analysis

(https://www.wallstreetmojo.com/comparable-company-analysis-
comps/), and precedent transactions
(https://www.wallstreetmojo.com/transaction-multiples/) are the three

most used methodologies for valuation. The question about ranking is

tricky. Usually, precedent transactions are higher than the comparable

companies as control premium is built into it. In the case of DCF, it can
go both ways (highest or lowest) depending on the assumptions you

make during the computation.

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(https://www.wallstreet #9 –  Other than these three, what are the

mojo.com/)
other methodologies? Give a brief.
Other than the above 3, you can talk about the following

methodologies –

LBO Analysis: LBO Analysis

(https://www.wallstreetmojo.com/leverage-buyout-lbo-
analysis/) helps a rm determine how much PE a rm 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, they are added together.
Liquidation Valuation: The whole idea of Liquidation Valuation

(https://www.wallstreetmojo.com/liquidation-value/) is to
imagine that all the assets of the company are sold off. And then
once the gure comes up, the liabilities are subtracted from the

gure. This is the capital (if at all) equity investors receive.

M&A Premiums Analysis: First M&A deals are analyzed to gure

out how much premium each buyer paid and then utilizing the
information to nd out how much the company is worth.
Replacement Value: The valuation of replacing the assets of the

company would be the replacement value.

#10 – What is precedent transactional

analysis?
In simple words the precedent transactional analysis is a valuation

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10/2/2019 Top 25 Valuation Interview Questions with Answers (Must Know!)

In simple words, the precedent transactional analysis is a valuation

method which takes the past transactions of similar companies to

(https://www.wallstreet
mojo.com/) value a company.

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

Firstly, the similar companies are chosen based on the similar

features or being in the similar industry.

Secondly, the size of the transactions should be similar.
Thirdly, the type of transaction and the features of buyers would

be same.
Fourthly, transactions which happened more recently have been

considered more valuable.

Fifthly, the estimate is being made on the basis of 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 classi cation.

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 nancial criteria if you want
to go more speci c. Under nancial criteria, you would look at

revenue, EBITDA, EBITDAR

(https://www.wallstreetmojo.com/ebitdar/), EBIT, etc.

Thirdly, the last you should consider is geography.

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(https://www.wallstreet Usually, the rst factor (industry classi cation) is used most and the

mojo.com/) least used factor is 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 an expected valuation interview question. Be sure to
answer this correctly.

Banks are primarily valued using Price to Book Value multiple

(https://www.wallstreetmojo.com/price-to-book-value-ratio/). This is
because of the following reasons –

Banks have assets and liabilities which are periodically marked

to market, as it is mandatory under regulations. So, the Balance
Sheet (https://www.wallstreetmojo.com/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
(https://www.wallstreetmojo.com/corporate-bonds/) or municipal

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bonds, along with commercial, mortgage, or personal loans that

(https://www.wallstreet are generally expected to be collectible.

mojo.com/)
Below graph shows a quick comparison of Historical Book values of
JPMorgan, UBS, Citigroup, and Morgan Stanley.

source: charts (http://go.ycharts.com/wallstreetmojo)

#13 – What are some examples of industry-

speci c multiples?
This one is another important valuation interview question. Industry-
speci c multiples vary as per the industrial factors. Let’s look at four

examples –

Real Estate Investment Trusts (REITs): Price / Funds from

operations (FFO) (https://www.wallstreetmojo.com/ffo-funds-

from-operations/); Price / Adjusted Funds from operations

(AFFO)
Retail or Airlines: Enterprise Value (EV) / Earnings before

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interests, taxes, depreciation, amortization and rent (EBITDAR)

(https://www.wallstreet Technology: EV / Unique Visitors; EV / Page-views

mojo.com/) 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 that have several

divisions unrelated to each other. For example, if a company has an

energy division, consumer nance division, technology division, and
media division; the sum of the parts would be pretty useful.

Let us understand the Sum of the Parts valuation

(https://www.wallstreetmojo.com/sum-of-the-parts-sotp-
valuation/) using an example of a large conglomerate company (ticker

MOJO) operates the following business segments

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(https://www.wallstreet
mojo.com/)

(https://cdn.wallstreetmojo.com/wp-content/uploads/2014/05/Sum-
of-Parts-Example-MOJO-Company1.png)

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)

Sotware 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

(https://www.wallstreetmojo.com/careers-in-banking-sector/)
E-commerce Segment – We use EV/Sales to value E-commerce
segment (if the segment is not pro table) or EV/Subscriber or PE
multiple

#15 –  When would you use a liquidation

valuation & when liquidation valuation will
produce the highest value?

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Liquidation valuation is useful when there are any bankruptcy

(https://www.wallstreet
situations. If a company has a chance to go belly up, liquidation
mojo.com/)
valuation will help to 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
rm 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.

#16 – In the case of free cash ow 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 ow, you need to use enterprise value
(https://www.wallstreetmojo.com/enterprise-value/).

Below are the enterprise value multiples –

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(https://www.wallstreet
mojo.com/)

And, in the case of levered free cash ow, you should use equity
value. Here’s why. In unlevered free cash ow, interest is excluded.
Thus, the money is available to investors. But in the case of levered

free cash ow, interest is included; thus, it is only available to equity

holders.

Below is the list of Equity Value Multiples –

(https://cdn.wallstreetmojo.com/wp-content/uploads/2014/04/Equity-
Value-Multiple.png)

  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 ti th i l ti t l H th l

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10/2/2019 Top 25 Valuation Interview Questions with Answers (Must Know!)

PE ratio as the primary valuation tool. However, there are several

limitations of PE Ratio due to which EV to EBITDA is considered to be
(https://www.wallstreet
mojo.com/) a better valuation multiple.

PE Ratio does not take balance sheet risk into consideration. The

fundamental position of the company is not re ected correctly in

PE Multiple.
Different debt to equity structure can have a signi cant effect on
the company’s earnings. Earnings can vary widely for companies
that have debt due to a component of Interest Payments
affecting the Earnings Per Share

(https://www.wallstreetmojo.com/earnings-per-share-basic-eps-
diluted-eps/).
It cannot be used when earnings are negative. For example, Box
Inc. You cannot simply nd PE Multiple for such unpro table
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?

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(https://www.wallstreet
mojo.com/)

Have look at the above Box IPO Financial model with forecasts
(https://www.wallstreetmojo.com/free- nancial-modeling-training-
course/). What we note is 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 ow negative?

In such cases, we cannot apply valuation multiples like PE ratio

(https://www.wallstreetmojo.com/pe-ratio/) (due to negative
earnings), EV to EBITDA (https://www.wallstreetmojo.com/ev-to-
ebitda-multiple-formula/) (if EBITDA is negative) or DCF approach
(when FCFF (https://www.wallstreetmojo.com/free-cash- ow- rm-

fcff/) is negative).  The valuation tool that comes to our rescue is EV to
Sales!

#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

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10/2/2019 Top 25 Valuation Interview Questions with Answers (Must Know!)

(https://www.wallstreet
mojo.com/) (https://cdn.wallstreetmojo.com/wp-
content/uploads/2014/07/Terminal-Value-Formula-Perpetuity-
Method-Type-2.png)

In the formula above, if we assume WACC

(https://www.wallstreetmojo.com/weighted-average-cost-capital-

wacc/) < growth rate, then the Terminal Value derived from the
formula will be Negative. This is very dif cult to digest as a high
growth company is now showing a negative terminal value just
because of the formula used. However, this high growth rate
assumption is incorrect. We cannot assume that a company is going

to grow at a very high rate until in nite.

For more details, please have a look at this detailed Guide to Terminal

value (https://www.wallstreetmojo.com/terminal-value-formula-
method-calculations-in-excel/)

#20 – When would you not use a DCF in

valuation?
In two particular situations, you should never use DCF –

Firstly, if the rm has unpredictable or unsteady cash ows.

Secondly, when debt and working capital serve a completely

different role altogether. For example, DCF is not used to value
banks as banks and nancial institutions don’t reinvest their debt

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and working capital (https://www.wallstreetmojo.com/working-

(https://www.wallstreet capital-formula/).
mojo.com/)

#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 ow between year 1 and nal year. So the

analysis is done the basis of terminal value only. In the case of DCF,
the valuation is done both on the basis of cash ows and the terminals
values; thus it tends to be higher.

Moreover, in LBO, an expected IRR (Internal Rate of Return

(https://www.wallstreetmojo.com/npv-vs-irr/)) is set up and then the
valuation is done.

#22 – Let’s say that a company has no pro t

and no revenue. How would you value that
company?
The simplest way to look at it is to answer that is to say that the

valuation of the company would be done by using other metrics. As

there is no pro t and no revenue, there won’t be any cash ow. 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?

This may seem to be a tricky question, but if you think it through it’s
t ll t

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10/2/2019 Top 25 Valuation Interview Questions with Answers (Must Know!)

actually not.

(https://www.wallstreet
When you are asked this question, you would simply say that the
mojo.com/)
mango tree would be valued as a company can be valued – rst by
glancing toward the comparable mango trees and what they are
worth (i.e. relative valuation) and then nding out the value of the

mango tree’s cash ows (i.e. intrinsic valuation).

#24 – What are the aws with public

company comparables?
There may be various aws with public company comparables. But
the following three stands out –

The stock market doesn’t have a xed way of reacting. It reacts

impulsively on the events or happenings in the market. So, it is
very dif cult to predict the reaction of the stock market on a

given day. Thus, the factors you use may not help you at all.
100% comparison of one company with another is never
possible. There will always be room for error.
Smallest companies have tiniest stocks. And these stocks may
not always re ect 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 few differences –

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First of all, you need to think about the liquidity of the private
(https://www.wallstreet
mojo.com/) 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.
DCF becomes very dif cult 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.

  Valuation Interview Questions

and Answers Video

  Recommended Articles

This has been a guide to the Top 25 Valuation interview questions

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g p q

with answers. Here we’ve divided these questions into the basic,
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application and advanced questions on valuation. There are many
mojo.com/)
more questions that can be asked in the valuation interview. But the
above are the top 25 questions on valuation have been asked again
and again.

So, prepare your fundamentals rst before going into any valuation
interview and keep this list of questions and answers handy so that
you can refer back to them whenever you would require. We wish you
all the best for your valuation interview!

You may also have a look at the following interview questions articles

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