What Interviewers Are Testing
This question checks whether you understand valuation as a toolkit, not a single formula. Interviewers are looking for a structured answer that covers market-based methods, intrinsic methods, and transaction-based methods. They also test how you think about method selection under different business contexts.
A strong response shows method breadth and method judgment. For example, you should explain that trading comps reflect current market sentiment, precedents include control premiums, and DCF estimates intrinsic value from future cash flows. When you articulate why outputs differ across methods, you demonstrate real analytical depth.
How to Structure the Answer
- Comparable company analysis for current market-implied valuation multiples.
- Precedent transaction analysis for paid control value in historical deals.
- Discounted cash flow analysis for intrinsic valuation based on projected cash generation.
- Cross-check and triangulation to build a defensible valuation range.
Deliver in this order. It is concise, complete, and easy for interviewers to follow. If they ask for more depth, expand whichever method they choose.
Worked Example Answer
"I would typically value a company using three core methods: comparable companies, precedent transactions, and DCF. Comparable companies provide a market-based view using current public multiples. Precedent transactions show what buyers have actually paid, including control premium, for similar assets.
Then I would run a DCF to estimate intrinsic value from projected unlevered free cash flow discounted at WACC, plus a terminal value assumption. Since each method captures different information, I would triangulate results into a valuation range rather than rely on one point estimate.
I would also explain key sensitivities, especially around growth, margin, WACC, and terminal assumptions, because those often drive the spread between high and low values."
Method Trade-Offs Interviewers Expect You to Know
Comps: fast and market-relevant, but can inherit temporary market mispricing.
Precedents: include control dynamics, but can be stale and deal-specific.
DCF: conceptually intrinsic, but highly sensitive to model assumptions.
Mentioning these trade-offs helps you avoid sounding mechanical. Interviewers often favor candidates who acknowledge model limitations while still making clear recommendations.
How to Calculate Answer Quality
- Coverage score: Did you include comps, precedents, and DCF?
- Judgment score: Did you explain why methods differ and how to reconcile outputs?
- Communication score: Was your framework delivered in clear sequence with no dead ends?
- Sensitivity score: Did you name key assumptions that can move valuation range?
Top answers do not stop at "three methods." They explain what each method means for real deal decisions.
Common Mistakes and Fixes
Mistake: listing methods with no interpretation.
Fix: attach one line on what each method captures and misses.
Mistake: treating one method as always best.
Fix: explain context and triangulate into a range.
Mistake: skipping sensitivity and assumption risk.
Fix: name 2-3 primary assumptions that drive the range spread.
Follow-Up Questions You Should Expect
- Why might precedents be higher than trading comps?
- When would you rely less on DCF output?
- How would you value an early-stage company with limited cash flow visibility?
- Which multiples matter most for this sector and why?
- How do you defend your final range if methods conflict materially?
Practice these follow-ups to show you can move from textbook frameworks to decision-level thinking.
Frequently Asked Questions
What valuation methods should I mention first?
Most candidates start with trading comps, precedent transactions, and DCF as the core interview framework.
Do I need to explain all methods in equal depth?
No. Explain the framework first, then go deeper on whichever method the interviewer asks you to expand.
Why is DCF often considered more intrinsic?
DCF is based on projected cash flows and discounting assumptions, so it is less dependent on current market multiples.
When are precedent transactions most useful?
Precedents are useful when discussing control value and what buyers paid historically in similar strategic contexts.
What mistake hurts this answer most?
Listing methods without explaining what each method captures and where each can mislead.