Valuation & Technical Interview Fundamentals

Chapter 8 built the accounting foundation; Chapter 9 covered why deals happen. This chapter is the actual technical skill that sits under both: the four valuation methodologies that come up in essentially every finance technical interview, and that this site has real, downloadable templates for.

"Walk me through a DCF"

This is close to the single most-asked technical question in finance interviews, across every seat type.

1. Forecast unlevered free cash flow for 5ish years — start from revenue, apply a margin assumption to get to EBIT, tax-affect it, add back D&A, subtract capex and the change in net working capital.
2. Discount those cash flows back to today using the company's WACC (weighted average cost of capital) — the blended return investors require given the company's mix of debt and equity.
3. Estimate a terminal value for everything beyond the forecast window — either a perpetuity growth rate or an exit multiple. Discount that back too.
4. Sum the discounted cash flows and the discounted terminal value to get Enterprise Value.
5. Bridge to equity value: subtract net debt, divide by shares outstanding to get a per-share value.
6. Compare to the current share price.

The line that signals real understanding, not memorization: "A DCF is only as good as its assumptions — I'd always sensitize it across a range of WACC and terminal growth, not present one number as if it were precise."

"Walk me through an LBO"

The core question: can a private equity firm buy this company mostly with borrowed money, use the company's own cash flow to pay that debt down, and sell it later for a return that justifies the risk?

1. Sources & Uses: how much of the purchase price comes from debt vs. the sponsor's own equity (typically 60-70% debt in a traditional LBO).
2. Build a debt paydown schedule: the company's free cash flow each year pays down that debt.
3. Project an exit in year 3-7, usually at a similar multiple to entry (the conservative, no-multiple-expansion assumption).
4. Back out returns: equity at entry vs. equity value at exit gives you IRR and MOIC.

LBO returns come from three levers — debt paydown, multiple expansion, and EBITDA growth. A good candidate can name which lever is doing the most work in a given deal.

"Walk me through an M&A model" (accretion/dilution)

Does the deal increase or decrease the acquirer's earnings per share?

1. Combine the two companies' financials.
2. Figure out the financing mix: cash, new debt, new stock — this single choice drives almost everything else.
3. Compute pro forma net income (adjusted for financing costs).
4. Compute pro forma shares outstanding (up, if stock-funded).
5. Pro forma EPS = pro forma net income ÷ pro forma shares. Higher than the acquirer's standalone EPS is "accretive," lower is "dilutive."

The real nuance: a cheap deal funded with cash is almost always accretive; a deal funded with stock is accretive only if the acquirer's own P/E is higher than the target's. And — worth remembering from Chapter 9's AOL–Time Warner example — accretive doesn't automatically mean "good deal."

"Walk me through a comps analysis"

1. Pick a genuinely comparable peer set — same industry, similar size, similar growth/margin profile.
2. Compute each peer's multiples: P/E, EV/EBITDA, EV/Sales.
3. Take the peer median (not average — one outlier shouldn't swing the read).
4. Apply that median multiple to your subject company's own metric to get an implied valuation.

The answer that signals real judgment: "If my subject trades meaningfully below the peer median, that's not automatically a buy signal — it could mean the market is pricing in something real that a simple multiple doesn't capture." This is exactly the discipline this site's own Hype vs Fundamentals module is built around.

Practice on this site

Every one of these four models exists as a real, downloadable template, prefilled with real data for any company you pick — every cell is a live Excel formula, so you can trace exactly how changing one assumption moves the whole output.