Investment Banking Interview Questions

Technical Questions & Answers

Technical questions are evolving beyond basic valuation and accounting principles to assess deeper understanding and analytical skills.

Accounting Questions & Answers – Basic

Covers the fundamental accounting concepts to master:

• Understanding the 3 financial statements (Income Statement, Balance Sheet, Cash Flow Statement) and their purpose.
• Knowing how the 3 statements link together.
• Understanding different accounting methods: cash-based vs. accrual.
• Differentiating between when to expense vs. capitalize.
• Interpreting individual items on financial statements.

1. Walk me through the 3 financial statements.

• Income Statement: Reports revenue and expenses to arrive at Net Income.
• Balance Sheet: Shows Assets (resources), Liabilities (obligations), and Shareholders’ Equity (ownership stake); Assets = Liabilities + Shareholders’ Equity.
• Cash Flow Statement: Starts with Net Income, adjusts for non-cash expenses and changes in working capital, and shows cash flow from investing and financing activities, resulting in the net change in cash.

2. Examples of major line items on each of the financial statements?

• Income Statement: Revenue, Cost of Goods Sold, SG&A, Operating Income, Pretax Income, Net Income.
• Balance Sheet: Cash, Accounts Receivable, Inventory, PP&E, Accounts Payable, Accrued Expenses, Debt, Shareholders’ Equity.
• Cash Flow Statement: Net Income, Depreciation & Amortization, Stock-Based Compensation, Changes in Operating Assets & Liabilities, Cash Flow From Operations, Capital Expenditures, Cash Flow From Investing, Sale/Purchase of Securities, Dividends Issued, Cash Flow From Financing.

3. How do the 3 statements link together?

• Net Income from the Income Statement flows into Shareholders’ Equity on the Balance Sheet and into the top line of the Cash Flow Statement.
• Balance Sheet changes in items appear as working capital adjustments on the Cash Flow Statement.
• Investing and financing activities affect Balance Sheet items like PP&E, Debt, and Shareholders’ Equity.
• Cash and Shareholders’ Equity on the Balance Sheet act as "plugs," with Cash flowing from the bottom line of the Cash Flow Statement.

4. With only 1 statement, which would you use to review the overall health of a company?

• Cash Flow Statement, as it provides a true picture of cash generation, independent of non-cash expenses.

5. With only 2 statements, which would you use to assess a company’s prospects?

• Income Statement and Balance Sheet, as the Cash Flow Statement can be derived from these two, assuming prior and current Balance Sheets are available.

6. Walk me through how Depreciation going up by 10 would affect the statements.

• Income Statement: Operating Income decreases by 10, and with a 40% tax rate, Net Income decreases by 6.
• Cash Flow Statement: Net Income decreases by 6, but the 10 Depreciation (non-cash) is added back, increasing Cash Flow from Operations by 4. Overall, net change in cash increases by 4.
• Balance Sheet: PP&E decreases by 10 due to Depreciation, and Cash increases by 4. Total Assets decrease by 6. Shareholders’ Equity decreases by 6 due to the decrease in Net Income, balancing both sides of the equation.

7. If Depreciation is a non-cash expense, why does it affect the cash balance?

• Depreciation is tax-deductible, reducing the amount of taxes paid, which directly affects cash flow.

8. Where does Depreciation usually show up on the Income Statement?

• As a separate line item or embedded in Cost of Goods Sold or Operating Expenses, varying by company.

9. What happens when Accrued Compensation goes up by 10?

• Assuming the compensation is recognized as an expense, Operating Expenses increase by 10, Pre-Tax Income falls by 10, and Net Income falls by 6 (assuming a 40% tax rate).
• On the Cash Flow Statement, Net Income is down by 6, and Accrued Compensation increases Cash Flow by 10, so overall Cash Flow from Operations is up by 4.
• On the Balance Sheet, Cash is up by 4, so Assets are up by 4. Accrued Compensation (a liability) is up by 10, and Retained Earnings are down by 6 due to the Net Income decrease, so both sides balance.

10. What happens when Inventory goes up by 10, assuming you pay for it with cash?

• No changes to the Income Statement.
• On the Cash Flow Statement, Inventory as an asset decreases Cash Flow from Operations by 10, decreasing the Net Change in Cash by 10.
• On the Balance Sheet, Inventory is up by 10, and Cash is down by 10, so the changes cancel out, and the Balance Sheet remains balanced.

11. Why is the Income Statement not affected by changes in Inventory?

• The expense is recorded only when the goods are sold, not when they are just sitting in a warehouse.

12. Apple buys 100 worth of new iPad factories with debt. How are the 3 statements affected at the start of “Year 1,” before anything else happens?

• Income Statement: No changes yet.
• Cash Flow Statement: Investment in factories decreases Cash Flow from Investing by 100, and raising 100 in debt increases Cash Flow, so net change in cash is zero.
• Balance Sheet: PP&E is up by 100, and debt is up by 100, so both sides balance.

13. Now let’s go out 1 year, to the start of Year 2. Assume the debt is high-yield so no principal is paid off, and assume an interest rate of 10%. Also assume the factories depreciate at a rate of 10% per year. What happens?

• Operating Income decreases by 10 due to the 10% depreciation charge each year, and the 10 in additional Interest Expense decreases the Pre-Tax Income by 20 altogether (10 from the depreciation and 10 from Interest Expense).
• Assuming a tax rate of 40%, Net Income would fall by 12.
• On the Cash Flow Statement, Net Income at the top is down by 12. Depreciation is a non-cash expense, so you add it back and the end result is that Cash Flow from Operations is down by 2. That’s the only change on the Cash Flow Statement, so overall Cash is down by 2.
• On the Balance Sheet, under Assets, Cash is down by 2 and PP&E is down by 10 due to the depreciation, so overall Assets are down by 12.
• On the other side, since Net Income was down by 12, Shareholders’ Equity is also down by 12 and both sides balance. Remember, the debt number under Liabilities does not change since we’ve assumed none of the debt is actually paid back.

14. At the start of Year 3, the factories all break down and the value of the equipment is written down to 0. The loan must also be paid back now. Walk me through the 3 statements.

• Income Statement: With a 40% tax rate, Net Income declines by 48.
• Cash Flow Statement: Net Income is down by 48 but the write-down is a non-cash expense, so we add it back – and therefore Cash Flow from Operations increases by 32. There are no changes under Cash Flow from Investing, but under Cash Flow from Financing there is a 100 charge for the loan payback – so Cash Flow from Investing falls by 100. Overall, the Net Change in Cash falls by 68.
• Balance Sheet: Cash is now down by 68 and PP&E is down by 80, so Assets have decreased by 148 altogether.
• On the other side, Debt is down 100 since it was paid off, and since Net Income was down by 48, Shareholders’ Equity is down by 48 as well. Altogether, Liabilities & Shareholders’ Equity are down by 148 and both sides balance.

15. Now let’s look at a different scenario and assume Apple is ordering 10 of additional iPad inventory, using cash on hand. They order the inventory, but they have not manufactured or sold anything yet – what happens to the 3 statements?

• No changes to the Income Statement.
• Cash Flow Statement – Inventory is up by 10, so Cash Flow from Operations decreases by 10. There are no further changes, so overall Cash is down by 10.
• On the Balance Sheet, Inventory is up by 10 and Cash is down by 10 so the Assets number stays the same and the Balance Sheet remains in balance.

16. Now let’s say they sell the iPads for revenue of 20, at a cost of 10. Walk me through the 3 statements under this scenario.

• Income Statement: Revenue is up by 20 and COGS is up by 10, so Gross Profit is up by 10 and Operating Income is up by 10 as well. Assuming a 40% tax rate, Net Income is up by 6.
• Cash Flow Statement: Net Income at the top is up by 6 and Inventory has decreased by 10, which is a net addition to cash flow – so Cash Flow from Operations is up by 16 overall. These are the only changes on the Cash Flow Statement, so Net Change in Cash is up by 16.
• On the Balance Sheet, Cash is up by 16 and Inventory is down by 10, so Assets is up by 6 overall. On the other side, Net Income was up by 6 so Shareholders’ Equity is up by 6 and both sides balance.

17. Could you ever end up with negative shareholders’ equity? What does it mean?

• Yes, in leveraged buyouts with dividend recapitalizations or if a company has been losing money consistently.
• It means that the owner of the company has taken out a large portion of its equity, which can sometimes turn the number negative.
• Shareholders’ Equity = Total Assets - Total Liabilities
• It doesn’t “mean” anything in particular, but it can be a cause for concern and possibly demonstrate that the company is struggling (in the second scenario).

18. What is Working Capital? How is it used?

• Working Capital = Current Assets – Current Liabilities. Positive if a company can pay its short-term liabilities with its short-term assets.
• Operating Working Capital = (Current Assets – Cash & Cash Equivalents) – (Current Liabilities – Debt).

19. What does negative Working Capital mean? Is that a bad sign?

• Not necessarily. It can mean:
• High Deferred Revenue balances (subscription companies).
• Efficient management of Accounts Payable (retail/restaurant companies).
• Financial trouble or possible bankruptcy.

20. Banks writing down assets, taking quarterly losses. Walk me through the statements when there’s a write-down of 100.

• Income Statement: Pre-Tax Income decreases by 100, and Net Income decreases by 60 (assuming a 40% tax rate).
• Cash Flow Statement: Net Income decreases by 60, but the write-down is a non-cash expense, so Cash Flow from Operations increases by 40.
• Balance Sheet: Cash increases by 40, an asset decreases by 100, so total Assets decrease by 60. Shareholders’ Equity decreases by 60, so both sides balance.

21. Walk me through a 100 “bailout” of a company and how it affects the 3 statements.

• Assuming an equity investment from the government:
• Income Statement: No changes.
• Cash Flow Statement: Cash Flow from Financing increases by 100, so the Net Change in Cash increases by 100.
• Balance Sheet: Cash increases by 100, and Shareholders’ Equity increases by 100, so both sides balance.

22. Walk me through a 100 write-down of debt on a company’s balance sheet and how it affects the 3 statements.

• Income statement- pre tax income and net income increases to $100 and $60 respectively
• Cash flow satement net income increases by $60, and cash flow operations decreases by $40
• For the balance sheet cash decreases so asssets are down by $40. debt is down by $100 while shareholders equity is down by 60

23. When would a company collect cash from a customer and not record it as revenue?

• When providing services in the future: web-based subscriptions, cell phone contracts, magazine subscriptions.

24. If cash collected is not recorded as revenue, what happens to it?

• Goes into Deferred Revenue on the Balance Sheet. As services are performed, it turns into real revenue on the Income Statement.

25. What’s the difference between accounts receivable and deferred revenue?

• Accounts Receivable: revenue recognized, waiting for cash
• Deferred Revenue: cash collected, waiting to perform the revenue

26. How long does it usually take for a company to collect its accounts receivable balance?

• Generally in the 30-60 day range.

27. What’s the difference between cash-based and accrual accounting?

• Cash-based: recognizes revenue and expenses when cash is received or paid out
• Accrual: recognizes revenue when collection is reasonably certain and expenses when they are incurred rather than when they are paid out in cash

28. Customer pays with a credit card. What would this look like under cash-based vs. accrual accounting?

• Cash-based: accounting, the revenue would not show up until the company charges the customer’s credit card, receives authorization, and deposits the funds in its bank account at which point it would show up as both Revenue on the Income Statement and Cash on the Balance Sheet.
• In accrual accounting, it would show up as Revenue right away but instead of appearing in Cash on the Balance Sheet, it would go into Accounts Receivable at first. Then, once the cash is actually deposited in the company’s bank account, it would “turn into” Cash.

29. How do you decide when to capitalize rather than expense a purchase?

• Capitalize: asset has a useful life of over 1 year, it is capitalized (put on the Balance Sheet rather than shown as an expense on the Income Statement). Then it is depreciated (tangible assets) or amortized (intangible assets) over a certain number of years.
• Expense: Employee salaries and the cost of manufacturing products (COGS) only cover a short period of operations and therefore show up on the Income Statement as normal expenses instead.

30. Why do companies report both GAAP and non-GAAP (or “Pro Forma”) earnings?

• GAAP: more regulation to it following the standards
• NON-GAAP: more flexability to add in non-cash charges: that impact profit

31. A company has had positive EBITDA for the past 10 years, but it recently went bankrupt. How could this happen?

• Several possibilities:
  • Capital expenditures: are high and not reflected in ebitda ( cash flow negative companies)
  • High interest debt: can no longer afford debt
  • Debt Maturity: all the debt matures and no has the money to refinance it
  • One time charges: litigation etc

32. Normally Goodwill remains constant on the Balance Sheet – why would it be impaired and what does Goodwill Impairment mean?

• Usually happens when a company has been acquired and the acquirer re assesses is worth significantly less of what they thought.
• often happens in acquisitions where the buyer “overpaid” for the seller and can result in a large net loss on the Income Statement (see: eBay/Skype).
• happen when a company discontinues part of its operations and must impair the associated goodwill.

33. Under what circumstances would Goodwill increase?

• company re-assesses its value and finds that it is worth more, but that is rare.
• gets acquired or bought out and Goodwill changes as a result, since it’s an accounting “plug” for the purchase price in an acquisition.
• acquires another company and pays more than what its assets are worth – this is then reflected in the Goodwill number.

34. What’s the difference between LIFO and FIFO? Can you walk me through an example of how they differ?

• First-In, First-Out (FIFO) method assumes that the first unit making its way into inventory is the first sold.
• Last-In, First-Out (LIFO) method assumes that the last unit making its way into inventory is sold first.

Accounting Questions & Answers – Advanced

covers how to actually project a company’s financial statements in an operating model.

1. How is GAAP accounting different from tax accounting?

• GAAP is accrual-based but tax is cash-based.
• GAAP uses straight-line depreciation or a few other methods whereas tax accounting is different (accelerated depreciation).
• GAAP is more complex and more accurately tracks assets/liabilities whereas tax accounting is only concerned with revenue/expenses in the current period and what income tax you owe.

2. What are deferred tax assets/liabilities and how do they arise?

• Deferred Tax Liabilities arise when you have a tax expense on the Income Statement but haven’t actually paid that tax in cold, hard cash yet; Deferred Tax Assets arise when you pay taxes in cash but haven’t expensed them on the Income Statement yet.
• They’re most common with asset write-ups and write-downs in M&A deals – an asset write-up will produce a deferred tax liability while a write-down will produce a deferred tax asset

3. Walk me through how you create a revenue model for a company.

There are two ways you can do it one being bottoms up model and the other being top down model.

• Bottoms Up:

  • estimating the average sale value or customer value.
  • growth rate in sales
    *sale values to tie everything together.

• Tops down:
  *overall market size,

  • company’s market share
    *how that will change
    *revenue

4. Walk me through how you create an expense model for a company.

• True bottoms up build: different employee structure of the company bonuses etc.
• Usually we assume that # of employees tied to revenue other matrix
• Cost of good sold should be tied directly to revenue etc.
• Internal plans of expansion plan etc

5. Let’s say we’re trying to create these models but don’t have enough information or the company doesn’t tell us enough in its filings – what do we do?

• Use estimates.
• If you don’t have enough information to look at separate product lines or divisions of the company, you can just assume a simple growth rate into future years.
• For the expenses, if you don’t have employee-level information then you can just assume that major expenses like SG&A are a percent of revenue and carry that assumption forward.

6. Walk me through the major items in Shareholders’ Equity.

Most common items:

• Common Stock – Simply the par value of however much stock the company has issued.
• Retained Earnings – How much of the company’s Net Income it has “saved up” over time.
• Additional Paid in Capital – This keeps track of how much stock-based compensation has been issued and how much new stock employees exercising options have created. It also includes how much over par value a company raises in an IPO or other equity offering.
• Treasury Stock – The dollar amount of shares that the company has bought back.
• Accumulated Other Comprehensive Income – This is a “catch-all” that includes other items that don’t fit anywhere else, like the effect of foreign currency exchange rates changing.

7. Walk me through what flows into Retained Earnings.

Retained Earnings = Old Retained Earnings Balance + Net Income – Dividends Issued

8. Walk me through what flows into Additional Paid-In Capital (APIC).

APIC = Old APIC + Stock-Based Compensation + Value of Stock Created by Option Exercises

9. What is the Statement of Shareholders’ Equity and why do we use it?

• This statement shows everything we went through above – the major items that comprise Shareholders’ Equity, and how we arrive at each of them using the numbers elsewhere in the statement.
• useful for analyzing companies with unusual stock-based compensation and stock option situations.

10. What are examples of non-recurring charges we need to add back to a company’s EBIT / EBITDA when looking at its financial statements?

 * Restructuring Charges
 * Goodwill Impairment
 * Asset Write-Downs
 * Bad Debt Expenses
 * Legal Expenses
 * Disaster Expenses
 * Change in Accounting Procedures

Note that to be an “add-back” or “non-recurring” charge for EBITDA / EBIT purposes, it needs to affect Operating Income on the Income Statement. So if you have one of these charges “below the line” then you do not add it back for the EBITDA / EBIT calculation.

11. How do you project Balance Sheet items like Accounts Receivable and Accrued Expenses in a 3-statement model?

• Normally you make very simple assumptions and assume these are percentages of revenue, operating expenses, or cost of goods sold.

• Examples:

  • Accounts Receivable: % of revenue
  • Deferred Revenue: % of revenue
  • Accounts Payable: % of cogs
  • Accrued Expenses: % of operating expenses or SG&A.

12. How should you project Depreciation and Capital Expenditures?

• The simple way: project each one as a % of revenue or previous PP&E balance.

• The more complex way: create a PP&E schedule that splits out different assets by their useful lives, assumes straight-line depreciation over each asset’s useful life, and then assumes capital expenditures based on what the company has invested historically.

13. How do Net Operating Losses (NOLs) affect a company’s 3 statements?

 * Quick and dirty way : you should reduce the taxable income by the portion of the  NOLs that you can use each year, apply the same tax rate, and then subtract that new Tax number from your old Pretax Income number
 * The way you should do this: create a book vs. cash tax schedule where you calculate the  Taxable Income based on NOLs, and then look at what you would pay in taxes without the NOLs. Then you book the difference as an increase to the Deferred Tax Liability on  the Balance Sheet.

14. What’s the difference between capital leases and operating leases?

They are used for short term lease and do not involve ownership of anything show up as income statement.

Longer term assets and has lessee ownership depreciate and intrest payments.

15. Why would the Depreciation & Amortization number on the Income Statement be different from what’s on the Cash Flow Statement?

• This happens if D&A is embedded in other Income Statement line items. When this happens, you need to use the Cash Flow Statement number to arrive at EBITDA because otherwise you’re undercounting D&A.

Enterprise / Equity Value Questions & Answers – Basic

• Enterprise Value is the value of the company that is attributable to all investors.
• Equity Value only represents the portion available to shareholders.
• Equity Value is the number the public sees, while Enterprise Value represents its true value.

2. When looking at an acquisition of a company, do you pay more attention to Enterprise or Equity Value?

• Enterprise Value, because that’s how much an acquirer really “pays” and includes the often mandatory debt repayment.

3. What’s the formula for Enterprise Value?

• EV = Equity Value + Debt + Preferred Stock + Noncontrolling Interest – Cash

4. Why do you need to add the Noncontrolling Interest to Enterprise Value?

• adjust to reflect if its owns more then 50% of the comp and you must add the non controlling side.

5. How do you calculate fully diluted shares?

• Basic share count and add in the dilutive effect of stock options and any other dilutive securities

6. Company has 100 shares outstanding, at a share price of 10 each. It also has 10 options outstanding at an exercise price of 5 each – what is its fully diluted equity value?

• Its basic equity value is 1,000 (100 * 10).
• There will be 10 new shares + 5 by buying back with the extra cash so you get 105 so the equity is 1,050 fully diluted.

7. Company has 100 shares outstanding, at a share price of 10 each. It also has 10 options outstanding at an exercise price of 15 each – what is its fully diluted equity value?

• 1,000, no dilutive only when above market

8. Why do you subtract cash in the formula for Enterprise Value? Is that always accurate?

• Cash is subtracted because it’s considered a non-operating asset and because Equity Value implicitly accounts for it.
• buyer would “get” the cash of the seller, so it effectively pays less for the company based on how large its cash balance is.

9. Is it always accurate to add Debt to Equity Value when calculating Enterprise Value?

• terms of a debt agreement usually say that debt must be refinanced in an acquisition.

10. Could a company have a negative Enterprise Value? What would that mean?

• Yes. It means that the company has an extremely large cash balance, or an extremely low market capitalization (or both).

11. Could a company have a negative Equity Value? What would that mean?

• No. This is not possible because you cannot have a negative share count and you cannot have a negative share price.

12. Why do we add Preferred Stock to get to Enterprise Value?

• Preferred Stock pays out a fixed dividend, and preferred stock holders also have a higher claim to a company’s assets than equity investors do. As a result, it is seen as more similar to debt than common stock.

13. How do you account for convertible bonds in the Enterprise Value formula?

• the conversion price of the bonds is below the current share price, then you count them as additional dilution to the Equity Value; if they’re out-of-the-money then you count the face value of the convertibles as part of the company’s Debt.

14. A company has 1 million shares outstanding at a value of 100 per share. It also has 10 million of convertible bonds, with par value of 1,000 and a conversion price of 50. How do I calculate diluted shares outstanding?

• $10 million value, /$1000 which you get 10000 bonds/ $1000/50 for $20 shares per bond meaning over all you have 200000 shares + so 1.2 million total.

15. What’s the difference between Equity Value and Shareholders’ Equity?

• Equity Value is the market value and Shareholders’ Equity is the book value.
• Equity Value can never be negative because shares outstanding and share prices can never be negative, whereas Shareholders’ Equity could be any value.
• For healthy companies, Equity Value usually far exceeds Shareholders’ Equity.

Enterprise / Equity Value Questions & Answers – Advanced

1. Are there any problems with the Enterprise Value formula you just gave me?

• Yes – it’s too simple.

• There are lots of other things you need to add into the formula with real companies:

  • Net Operating Losses – Should be valued and arguably added in, similar to cash.
  • Long-Term Investments – These should be counted, similar to cash.
  • Equity Investments – Any investments in other companies should also be added in, similar to cash (though they might be discounted).
  • Capital Leases – Like debt, these have interest payments – so they should be added in like debt.
  • (Some) Operating Leases – Sometimes you need to convert operating leases to capital leases and add them as well.
  • Unfunded Pension Obligations – Sometimes these are counted as debt as well.

2. Should you use the book value or market value of each item when calculating Enterprise Value?

• Technically, you should use market value for everything. In practice, however, you usually use market value only for the Equity Value portion. it’s almost impossible to establish market values for the rest of the items in the formula – so you just take the numbers from the company’s Balance Sheet.

3. What percentage dilution in Equity Value is “too high?”

• There’s no strict “rule” here but most bankers would say that anything over 10% is odd.
• If your basic Equity Value is 100 million and the diluted Equity Value is 115 million, you might want to check your calculations – it’s not necessarily wrong, but over 10% dilution is unusual for most companies.

Valuation Questions & Answers – Basic

1. What are the 3 major valuation methodologies?

• Comparable Companies, Precedent Transactions and Discounted Cash Flow Analysis.

2. Rank the 3 valuation methodologies from highest to lowest expected value.

• In general, Precedent Transactions will be higher than Comparable Companies due to the Control Premium built into acquisitions.
• a DCF could go either way and it’s best to say that it’s more variable than other methodologies. Often it produces the highest value, but it can produce the lowest value as well depending on your assumptions.

3. When would you not use a DCF in a Valuation?

• You do not use a DCF if the company has unstable or unpredictable cash flows (tech or bio-tech startup) or when debt and working capital serve a fundamentally different role.
• banks and financial institutions do not re-invest debt and working capital is a huge part of their Balance Sheets – so you wouldn’t use a DCF for such companies.

4. What other Valuation methodologies are there?

• Liquidation Valuation – Valuing a company’s assets, assuming they are sold off and then subtracting liabilities to determine how much capital, if any, equity investors receive
• Replacement Value – Valuing a company based on the cost of replacing its assets
• LBO Analysis – Determining how much a PE firm could pay for a company to hit a “target” IRR, usually in the 20-25% range
• Sum of the Parts – Valuing each division of a company separately and adding them together at the end
• M&A Premiums Analysis – Analyzing M&A deals and figuring out the premium that each buyer paid, and using this to establish what your company is worth
• Future Share Price Analysis – Projecting a company’s share price based on the P / E multiples of the public company comparables, then discounting it back to its present value

5. When would you use a Liquidation Valuation?

• This is most common in bankruptcy scenarios and is used to see whether equity shareholders will receive any capital after the company’s debts have been paid off.

6. When would you use Sum of the Parts?

• This is most often used when a company has completely different, unrelated divisions – a conglomerate like General Electric.
• you should not use the same set of Comparable Companies and Precedent Transactions for the entire company.

7. When do you use an LBO Analysis as part of your Valuation?

• Whenever you’re looking at a Leveraged Buyout – but it is also used to establish how much a private equity firm could pay, which is usually lower than what companies will pay.
• used to set a “floor” on a possible Valuation for the company you’re looking at.

8. What are the most common multiples used in Valuation?

• The most common multiples are EV/Revenue, EV/EBITDA, EV/EBIT, P/E (Share Price / Earnings per Share), and P/BV (Share Price / Book Value per Share).

9. What are some examples of industry-specific multiples?

 * Technology (Internet): EV / Unique Visitors, EV / Pageviews
 * Retail / Airlines: EV / EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortization & Rental Expense)
* Energy: EV / EBITDAX (Earnings Before Interest, Taxes, Depreciation, Amortization & Exploration Expense), EV / Daily Production, EV / Proved Reserve Quantities
* Real Estate Investment Trusts (REITs): Price / FFO per Share, Price / AFFO per Share  (Funds From Operations, Adjusted Funds From Operations)

10. When you’re looking at an industry-specific multiple like EV / Scientists or EV / Subscribers, why do you use Enterprise Value rather than Equity Value?

• You use Enterprise Value because those scientists or subscribers are “available” to all the investors (both debt and equity) in a company.
• need to think through the multiple and see which investors the particular metric is “available” to.

11. Would an LBO or DCF give a higher valuation?

• LBO will give you a lower valuation.

12. How would you present these Valuation methodologies to a company or its investors?

• Usually you use a “football field” chart where you show the valuation range implied by each methodology. You always show a range rather than one specific number

13. How would you value an apple tree?

• valuing