Home » The Best Way To Answer The Question: “How Would You Value A Company”

The Best Way To Answer The Question: “How Would You Value A Company”

For technical questions like that, there is no way around it: you have to know your stuff.

This question is very frequent in investment banking interviews, so you need to make sure you feel 100% comfortable with the most common valuation methodologies.

Learning answers by heart is a terrible strategy. You need to genuinely understand how each valuation method works to not only sound convincing while you’re answering, but also be able to handle follow-up questions, which are almost inevitable.

When we ask you the question “How would you value a company”, it’s best to keep it short and concise by giving an overview of the various valuation methods you can use to value a company. Just briefly explain how each method works, and what kind of data you need to use them in a valuation.

A common mistake made by many candidates is to say too much – they think that giving an academic lecture on DCF during the interview will show how smart they are. Don’t make this mistake. Only share more details on each valuation methodology if we ask you follow-up questions.

We provide an example of answer below.

Example of answer to the question: “How would you value a company?”

“To value a company, we can use several well-established valuation methodologies, including: discounted cash flow analysis (DCF), comparable comps analysis, and precedent transactions.

A DCF is an absolute measure of valuation that involves estimating the intrinsic value of a company by forecasting its future cash flows and discounting them back into the present.

Comparable Companies is a relative valuation methodology used to estimate the value of a stock using trading multiples from comparable companies, such as P/E, EV/EBITDA, EV/EBIT, etc. For example, by calculating the median EV/EBIT multiple of three companies that are relatively similar to the company we’re trying to value, we can then triangulate the Enterprise Value of the valued company by using its EBIT and the median EV/EBIT.
Precedent Transactions is another relative valuation methodology that involves estimating the value of a company by comparing it with other comparable businesses in the same industry that have been acquired. The process of the Precedent Transactions method is similar to the Comparable Companies valuation method, to the extent that we need to look for valuation multiples of comparable businesses. The main difference is that in the Precedent Transactions analysis, we’re looking at the valuation multiples at which comparable companies were acquired, not their trading multiples.”

Be ready to answer these follow-up questions

After you’ve answered this question, you will likely get some follow-up questions to test your understanding of each valuation method. Common follow-ups include:

Could you run me through a DCF?
What are the most common valuation multiples?
What are the main flaws of the comparable companies method?
In which cases would you use a precedent transaction analysis and why?

To help you ace your interviews, we have created a course that includes all the common technical questions you can expect during investment banking interviews. For each question, we give examples of high-performing answers prepared by former and current investment bankers from Goldman Sachs, Lazard, and PWP.

To learn more about this insider-made interview prep course, click here.

A word about the author

Aurelian Tran is the founder of Alpha Lane and an ex-Goldman Sachs analyst who has spent 4+ years working in the investment banking industry.

He founded Alpha Lane to help students and young professionals achieve their highest professional ambitions, by securing offers at top-tier financial institutions.

The Best Way To Answer The Question: “How Would You Value A Company”

Example of answer to the question: “How would you value a company?”

Be ready to answer these follow-up questions

A word about the author

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