potential technical questions

Walk me through a DCF valuation from assumptions to conclusion. 

• I would forecast unlevered free cash flows by projecting revenue, operating margins, taxes, capex, and changes in net working capital. 

• Then I would discount those cash flows using WACC, where cost of equity comes from CAPM and cost of debt is adjusted for taxes. 

• I would calculate terminal value using a perpetual growth rate tied to long-term GDP or an exit multiple consistent with comps. 

• Discounting the cash flows and terminal value gives enterprise value, which I reconcile to equity value by subtracting net debt and other non-operating claims, then dividing by shares outstanding. 

• I validate the result with sensitivities and comparable company analysis.

How do you project unlevered free cash flows?

• I start with revenue growth assumptions, project operating costs to get EBIT, apply taxes to get NOPAT, then add back non-cash items like D&A.

• From there, I subtract capex and changes in net working capital. This gives unlevered free cash flow available to all capital providers.

Explain terminal value methodologies and when each is appropriate.

• The two main methods are the perpetuity growth method and exit multiple method.

• Perpetuity growth is best for stable, mature businesses with long-term visibility.

• Exit multiples are useful when the business is typically valued on market multiples or when forecasting far out is difficult.

How do changes in working capital impact cash flow?

• An increase in net working capital is a use of cash because more money is tied up in operations.

• A decrease is a source of cash. Even if earnings are strong, growing working capital can reduce free cash flow.

How do you calculate WACC and which inputs drive valuation the most?

• WACC is the weighted average of the cost of equity and after-tax cost of debt.

• Cost of equity is typically calculated using CAPM.

• The most impactful inputs are the discount rate, terminal growth rate, and long-term margins.

What adjustments are required to move from enterprise value to equity value?

• You subtract net debt, including debt and debt-like items, and add excess cash.

• You also adjust for items like minority interest, preferred equity, pensions, and other non-operating assets or liabilities.

How do you select guideline public company comparables?

• I would focus on companies with similar industries, business model, size, growth, margins, location, and risk profile.

• No comp set is perfect, so the goal is to find firms the market would reasonably value in a similar way.

How do you treat outliers when analyzing multiples?

• I would investigate the reason first.

• Whether it’s due to one-time items, structural differences, or real risk.

• If it’s not representative, I exclude it or de-emphasize it using medians instead of means.

Explain the difference between EV/EBITDA, EV/Revenue, and P/E multiples.

EV/EBITDA compares operating performance independent of capital structure.

EV/Revenue is useful for early-stage or low-margin companies.

P/E focuses on equity value and is influenced by leverage and tax structure.

How would you value a company with negative EBITDA or cash flows?

I’d rely more on EV/Revenue multiples, asset-based valuation, or scenario-based DCFs.

I’d also focus on unit economics, path to profitability, and comparable companies at similar stages.

How do accounting items like goodwill, impairments, and deferred taxes affect valuation?

Goodwill itself doesn’t drive value but impairments signal weaker future cash flows.

Deferred taxes can affect enterprise-to-equity adjustments.

Valuation focuses on cash flow, not accounting earnings.

What is a control premium and when is it applied?

A control premium reflects the value of gaining control, such as decision-making authority and synergies.

It’s applied when valuing a controlling interest, not minority stakes.

What steps are involved in preparing a fairness opinion?

You analyze the transaction, value the company using multiple methodologies, assess assumptions, review market data, and document conclusions.

The goal is to determine whether the transaction is fair from a financial perspective.

How do you ensure objectivity and defensibility in valuation work?

By using multiple valuation methods, well-supported assumptions, market data, sensitivity analyses, and clear documentation.

Consistency and transparency are key.

How would rising interest rates affect valuation conclusions?

Higher rates increase WACC, which lowers present value.

They also pressure multiples and borrowing costs, typically leading to lower valuations.

What are the 3 financial statements and how do they connect?

The three financial statements are the income statement, balance sheet, and cash flow statement.

The income statement shows profitability over a period, and net income flows into retained earnings on the balance sheet.

The cash flow statement starts with net income and adjusts for non-cash items and changes in balance sheet accounts to arrive at ending cash.

Cash on the cash flow statement links back to the balance sheet, tying all three together.

What do you think analysts do in valuation?

Analysts build financial models, analyze data, research markets, test assumptions, and support conclusions that help clients make informed decisions.

What is a DCF in simple terms?

A DCF estimates what a company is worth today based on the cash it’s expected to generate in the future, discounted back for risk.

What happens if depreciation increases by $10?

EBIT decreases by $10, taxes decrease, net income falls, but cash flow increases by the tax shield since depreciation is non-cash.

What is the difference between valuation and asset management?

Valuation determines what something is worth.

Asset management focuses on investing capital and managing portfolios to generate returns.

Why does P/E vary across industries?

Because growth rates, risk, capital intensity, and margin profiles differ.

Higher growth and lower risk industries usually trade at higher P/E multiples.

What is CAPM and what are the implications?

CAPM estimates the cost of equity using risk-free rate, beta, and market risk premium.

Higher risk leads to higher discount rates and lower valuation.

risk-free rate + beta x market risk premium

What increases valuation?

Higher cash flows, faster growth, stronger margins, lower risk, and lower discount rates.

What decreases valuation?

Lower growth, margin pressure, higher risk, rising interest rates, and increased capital requirements.

What does it mean that a company has negative cash flows?

Negative cash flow means the company is spending more cash than it generates in a period.

This can be concerning, but it’s not always bad—early-stage or high-growth companies often have negative cash flows due to heavy investment.

The key is whether the spending is driving future profitability.