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, starting from revenue, applying 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.

Worked example, simplified to one year plus a terminal value: Year-1 unlevered FCF = $100M, WACC = 10%, terminal growth = 2%.

• Discount factor formula: 1 ÷ (1 + WACC)ⁿ. For year 1: 1 ÷ 1.10 = 0.909.
• PV of Year-1 FCF = $100M × 0.909 = $90.9M.
• Terminal value formula: FCF × (1 + g) ÷ (WACC − g) = $100M × 1.02 ÷ (0.10 − 0.02) = $102M ÷ 0.08 = $1,275M.
• PV of terminal value = $1,275M × 0.909 = $1,159M.
• Enterprise Value ≈ $90.9M + $1,159M = $1,250M.

A real DCF repeats the first step for 5 years instead of 1, but the mechanics (discount factor = 1/(1+WACC)ⁿ, terminal value = FCF×(1+g)/(WACC−g)) are exactly this, just repeated.

The line that signals real understanding, not memorization: "A DCF is only as good as its assumptions. I would 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.

Worked example: buy a company for 8x its $125M EBITDA = $1,000M, financed 65% debt ($650M) / 35% equity ($350M). Five years later, EBITDA has grown to $175M; assume the same 8x exit multiple (no multiple expansion): exit EV = 8 × $175M = $1,400M. Debt has been paid down from $650M to $300M over those five years.

• Exit equity value = exit EV − remaining debt = $1,400M − $300M = $1,100M.
• MOIC = exit equity ÷ entry equity = $1,100M ÷ $350M = 3.14x.
• Approximate IRR over 5 years: 3.14^(1/5) − 1 ≈ 26%.

Notice this 3.14x came entirely from EBITDA growth and debt paydown. Multiple expansion contributed nothing (entry and exit multiples are both 8x), exactly the kind of "which lever is doing the work" answer that signals real understanding.

"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."

Worked example (all-cash deal): Acquirer: net income $500M, 100M shares, EPS = $500M ÷ 100M = $5.00. Target: net income $100M, 50M shares, trading at a $30/share offer price → deal value = 50M × $30 = $1,500M, paid entirely in cash. That cash was earning 3% interest; losing it costs $1,500M × 3% = $45M pre-tax, or $45M × (1 − 25% tax) = $33.75M after-tax.

• Pro forma net income = $500M + $100M − $33.75M = $566.25M.
• Pro forma shares = 100M (unchanged, since it is a cash deal).
• Pro forma EPS = $566.25M ÷ 100M = $5.66.
• vs. standalone $5.00 → accretive by ($5.66 − $5.00) ÷ $5.00 = 13.2%.

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 does not 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, since one outlier should not swing the read).
4. Apply that median multiple to your subject company's own metric to get an implied valuation.

Worked example: five peers trade at P/E multiples of 18x, 19x, 20x, 22x, and 35x (one clear outlier). Median = 20x (the average would be a distorted 22.8x, exactly why median is preferred). Subject company's EPS = $3.00 → implied price = 20 × $3.00 = $60. If it is actually trading at $50, that is a 20% gap to where peers suggest it should trade ((60 − 50) ÷ 50).

The answer that signals real judgment: "If my subject trades meaningfully below the peer median, that is not automatically a buy signal. It could mean the market is pricing in something real that a simple multiple does not 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.