IB Interview Questions: Valuation

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Level 1 Valuation Questions

Valuation Big Picture

1. What are the three most common valuation methods?

There are three primary valuation methods. The first is Discounted Cash Flow Analysis (DCF) in which we value the Cash Flows of the Business.

Next, we could look at the valuations of similar Publicly Traded Businesses, which is called Trading Comparables (or ‘Trading Comps’).

The final primary approach is Transaction Comparables (or ‘Precedent Transactions’) where we look at the valuations of similar businesses that have been sold in the past.


2. Which of the primary valuation methods are ‘Intrinsic’ vs ‘Relative/Market-Based?’

The DCF approach is an ‘Intrinsic’ valuation because we’re looking at the value of underlying Cash Flow.

Both of the Comparables Analyses (Trading and Precedent Transactions) use peer valuations and thus are considered Relative or Market-based Valuations.

3. When we say we “triangulate” to a value, what does that mean? What methods might we use?

When valuing a business, we typically look at multiple valuation approaches (DCF, Trading Comps, Transaction Comps, LBO, etc.) and make a judgment call about the most appropriate valuation range.



4. Are there other methods of Business Valuation?

Yes, there are two other commonly used methods: LBO Valuation and Liquidation Analysis.

With an LBO analysis, we look at what a Private Equity firm could pay in a Leveraged Buyout (LBO) purchase and still achieve an attractive return.

With a Liquidation (or ‘Asset-Based’) Valuation, we assume the company liquidates all of its Asset (typically at a large discount to book value) and pays off all outstanding debts.

5. How would you value a Taco Stand?

You could use one of the three primary valuation methods: Discounted Cash Flow Analysis, Trading Comparables, or Transaction Comparables and you’d triangulate to a range of values based on the outputs of those three methods.

6. What is a “Football Field” in the context of valuation?

A Football Field is a common chart in Investment Banking that lays out the range of valuations for a particular company across multiple valuation methods (DCF, Comps, LBO, etc.).


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