Investment Banking Valuation Interview Prep

A complete set of vocabulary flashcards covering the key methodologies, metrics, and industry-specific nuances of valuation as presented in the Investment Banking Interview Guide.

Relative Valuation

A method of valuing a company by comparing it to what similar companies are worth, primarily using Public Comps and Precedent Transactions.

Intrinsic Valuation

A method of valuing a company by estimating the net present value of its future cash flows or estimating the value of its Assets net of Liabilities.

Public Comps (Comparable Public Companies)

A relative valuation methodology that uses the valuation multiples of other public companies in the same industry and with similar financial profiles.

Precedent Transactions

A relative valuation methodology that estimates a company's value based on the multiples paid in recent M&A deals involving similar companies.

Discounted Cash Flow (DCF) Analysis

An intrinsic valuation methodology where a firm’s value is the sum of its discounted future cash flows and its discounted terminal value (the value at the end of the analysis period).

Net Asset Value (NAV) / Liquidation Model

An intrinsic valuation methodology that values a firm's Assets and Liabilities, subtracting the modified Liability value from the modified Asset value; common in Balance Sheet-centric industries like insurance.

Control Premium

The premium a buyer must pay over a company’s current share price to acquire $100\%$ of the company, which often results in Precedent Transactions producing higher values than Public Comps.

Sum of the Parts

A valuation methodology where a company is split into different segments (e.g., Chemicals, Manufacturing), each valued separately with its own set of Comps and Transactions, then added together.

Leveraged Buyout (LBO) Analysis

A valuation variant where a private equity firm acquires a company and works backward from a target Internal Rate of Return (IRR), such as $15\%$ or $20\%$, to determine the maximum purchase price.

Football Field Graph

A visualization used in valuation presentations to show the wide potential range of a company's value implied by various methodologies.

EBIT (Earnings Before Interest & Taxes)

A company's Operating Income from its Income Statement, calculated as $\text{Revenue} - \text{COGS} - \text{Operating Expenses}$; it includes the impact of Depreciation and Amortization.

EBITDA

Calculated as $\text{EBIT} + \text{Depreciation} + \text{Amortization}$, this metric is intended to remove non-cash charges and more accurately reflect cash flow potential.

Unlevered Free Cash Flow (Free Cash Flow to Firm)

A metric representing cash available to all investors, calculated as $\text{EBIT} \times (1 - \text{Tax Rate}) + \text{Non-Cash Charges} - \text{Change in Operating Assets and Liabilities} - \text{CapEx}$.

Levered Free Cash Flow (Free Cash Flow to Equity)

A metric representing cash available only to equity investors, calculated as $\text{Net Income} + \text{Non-Cash Charges} - \text{Change in Operating Assets and Liabilities} - \text{CapEx} - \text{Mandatory Debt Repayments}$.

EV / EBITDAR

A valuation multiple used for Retail, Restaurant, and Airlines, where the 'R' stands for Rent; used to ensure comparability between companies that own buildings and those that rent them.

EV / EBITDAX

A valuation multiple used for Oil & Gas companies, where the 'X' stands for Exploration; it adds back exploration expense to normalize companies that capitalize vs. those that expense these costs.

Funds from Operations (FFO)

A common real estate metric for REITs that adds back Depreciation (a large non-cash charge) and adjusts for Gains and Losses on property sales.

M&A Premiums Analysis

An analysis of Precedent Transactions that calculates the premium a buyer paid over the seller's share price (e.g., 1 day, 20 days, or 60 days prior to announcement).

Future Share Price Analysis

A method that projects a company’s future share price based on a P / E multiple of comparable companies and discounts it back to present value using the Cost of Equity.

Calendarization

The process of adjusting different companies' fiscal years to match the same calendar period by adding and subtracting partial periods to ensure comparability.

Liquidity Discount

A discount (often $10-15\%$ or more) applied to public company comparable multiples when valuing a private company because it is not as 'liquid'.

Dividend Discount Model (DDM)

An intrinsic valuation method for financial institutions that sums the present value of future dividends and the present value of a terminal value.

Residual Income Model (Excess Returns Model)

A valuation for banks that adds the present value of excess returns—calculated as $\text{(ROE} \times \text{Book Value)} - \text{(Cost of Equity} \times \text{Book Value)}$—to the current Book Value.

Cap Rate (Capitalization Rate)

A real estate valuation metric used to value properties by dividing the property's Net Operating Income (NOI) by this market-derived rate.

Trailing Twelve Months (TTM)

A financial reporting period calculated as $\text{Most Recent Fiscal Year} + \text{New Partial Period} - \text{Old Partial Period}$.