Most Common Technical Finance Interview Questions - Wall Street Prep Questions With Complete Solutions

How do you value a company? - ans (1) Intrinsic value = DCF; (2) Relative Value = comparables/multiples What is Intrinsic Value? - ans More academically respected approach = DCF Valuation. DCF says value of a productive asset equals the PV of its cash flows. "1) Project FCFs for 5-20 years and then calculate a terminal value. 2) Discount both the FCF projections and TV by an appropriate cost of capital (WACC for unlevered DCF; Cost of equity for levered DCF). 3) In an unlevered DCF (more common) this will yield the company's enterprise value (aka firm and transaction value), from which we subtract net debt to arrive at equity value. 4) Divide equity value by diluted shares outstanding to arrive at equity value per share." What are relative valuations? - ans The second approach involved determining a comparable peer group = companies in the same industry with similar operational, growth, risk, and return on capital characteristics. Truly identical companies do not exist, but find as close as comparable as possible. Calculate the appropriate industry multiples. Apply the MEDIAN of these multiples on the relevant operating metric of the target company to arrive at a valuation. What are the common relative multiples? - ans EV/Rev ; EV/EBITDA ; P/E ; P/Book Some industries place more emphasis on some multiples vs. others, while other industries use different valuation multiples altogether.