Valuation Interview Questions: Three Methods, Three Answers

Northvale Medical, where the valuation interview starts

Northvale Medical Products makes surgical consumables. The last twelve months gave revenue of $620 million, EBITDA of $118 million, EBIT of $92 million and net income of $54 million. There are 40.0 million shares and the price is $31.50.

Market capitalization is 40.0 million times $31.50, which is $1,260 million. Debt is $260 million and cash is $70 million, so net debt is $190 million. Enterprise value is 1,260 plus 190, which is $1,450 million.

Four multiples follow immediately. Enterprise value over EBITDA is 1,450 over 118, which is 12.29 times. Enterprise value over revenue is 2.34 times. Earnings per share are 54 over 40, which is $1.35, and the price to earnings ratio is 31.50 over 1.35, which is 23.33 times. The EBITDA margin is 118 over 620, which is 19.0 percent.

Get the numerator and denominator paired correctly and most of the mistakes disappear. Enterprise value belongs above a pre interest measure such as EBITDA or EBIT. Equity value belongs above a post interest measure such as net income. Putting market capitalization over EBITDA produces a number that means nothing, and it is the most common error on the topic.

The three methods a valuation interview asks for, side by side

Trading comparables first. Five listed peers trade at 9.1, 10.2, 10.8, 12.4 and 13.6 times EBITDA. The median is 10.8 times. Apply it: 10.8 times 118 is $1,274.4 million of enterprise value, less net debt of $190 million gives $1,084.4 million of equity, which is $27.11 a share.

Precedent transactions next. Five completed deals in the sector cleared at 11.2, 12.0, 12.8, 13.5 and 15.0 times. The median is 12.8 times. That gives $1,510.4 million of enterprise value, $1,320.4 million of equity, and $33.01 a share.

Now our own discounted cash flow. Free cash flow runs $62, $66, $70, $73 and $76 million over five years. The discount rate is built from a risk free rate of 5.26 percent, which is where the ten year Treasury constant maturity stood on 29 September 2026, checked 1 October 2026 at federalreserve.gov. With a beta of 1.05 and an equity risk premium of 4.60 percent the cost of equity is 10.09 percent. Debt costs 6.80 percent before tax and 5.372 percent after the 21 percent federal rate the IRS states in Publication 542, checked 1 October 2026 at irs.gov. At 81 percent equity and 19 percent debt the weighted rate is 9.194 percent, which we round to 9.2 percent.

Terminal growth is 2.35 percent, which is the ten year Treasury yield of 5.26 percent less the ten year inflation indexed yield of 2.91 percent on the same release. The explicit five years discount to $266.2 million. The terminal value is $1,135.6 million, worth $731.3 million today. Enterprise value is $997.5 million, equity is $807.5 million, and the answer is $20.19 a share.

Two observations the table hands you for free. Switching from the median to the mean of the same five peers moves the answer by 4.6 percent, so the choice of central statistic is itself a valuation decision. And the precedent median sits two full turns above the trading median, which is 19 percent on the multiple.

Why the DCF sits below everything else

Look at the spread. The comparable range runs from $22.09 to $35.37 a share, the precedent range from $28.29 to $39.50, and our DCF lands at $20.19 while the shares change hands at $31.50.

The temptation is to adjust the DCF until it agrees. Resist it, because the DCF is doing its job. Its drivers are sober: single digit cash flow growth, a 9.2 percent discount rate, and terminal growth capped at the inflation the bond market prices. Those inputs say the business is worth 8.45 times EBITDA, and the market is paying 12.29 times.

That gap is information. It says the market is carrying either more growth, or a lower discount rate, or both, than our drivers admit. A candidate who quietly raises the growth rate until the DCF matches $31.50 has destroyed the only independent read in the room.

The right move is to make the gap explicit. State the three ranges, state that the DCF is the outlier, and then price the gap.

The reverse DCF that reconciles the spread

Run the model backwards. The market says enterprise value is $1,450 million. The explicit five years are worth $266.2 million at a 9.2 percent discount rate, so the market must be assigning $1,183.8 million of present value to the terminal value.

Undiscount that. The five year factor at 9.2 percent is 1.5528, so the implied terminal value is 1,183.8 times 1.5528, which is $1,838.3 million.

Now solve the Gordon formula for growth. With year five free cash flow of $76 million, the growth rate that produces a terminal value of $1,838.3 million is 4.86 percent. Check it: 76 times 1.04865, divided by 0.092 less 0.04865, gives $1,838.3 million, and the enterprise value comes back to exactly $1,450 million.

So the market price requires 4.86 percent of nominal cash flow growth forever. The bond market prices 2.35 points of inflation over ten years, from the same Federal Reserve release. The market is therefore carrying about two and a half points of real growth in perpetuity.

That sentence is the answer to "is this company expensive". It is checkable, it uses two published numbers, and it replaces an opinion with an assumption you can argue about. An interviewer can disagree with 2.5 points of perpetual real growth. Nobody can disagree with the arithmetic that produced it.

Cash, the first bridge question a valuation interview asks

Four bridge conventions move the answer. Here is the first.

We deducted all $70 million of cash. A business cannot run on zero cash, so part of that balance is working capital rather than surplus. Hold 2 percent of revenue as operating cash, which is $12.4 million, and only $57.6 million is genuinely excess. Net debt becomes $202.4 million and enterprise value becomes $1,462.4 million, or 12.39 times.

The effect on the valuation runs the other way. At the 10.8 times median, implied equity falls from $1,084.4 million to $1,072.0 million, so the price per share falls from $27.11 to $26.80.

Note the asymmetry, because it catches people. Treating less cash as excess raises the observed multiple on Northvale and lowers the value derived from peers. Both follow from the same change, and they move in opposite directions.

There is a matching convention on the debt side. We used the last reported balance sheet. A buyer would use net debt at the transaction date, which includes everything generated in between. On a business throwing off roughly $15 million a quarter, a two quarter gap is about 75 cents a share.

Leases, and the multiple that double counts

The second convention is the one that produces the largest error. Northvale carries an $85 million operating lease liability and pays $14 million of rent a year.

Three treatments exist. Ignore leases entirely and the multiple is 1,450 over 118, which is 12.29 times. Add the lease liability to debt and leave EBITDA alone and it is 1,535 over 118, which is 13.01 times. Add the liability to debt and add the rent back to EBITDA and it is 1,535 over 132, which is 11.63 times.

The middle row is the broken one. It counts the financing while leaving out the earnings that financing pays for, and it overstates the multiple by 11.9 percent against the consistent treatment. The first and third rows are both defensible. The only requirement is that every company in the peer set gets the same treatment, because comparing row one at one company to row three at another invents a gap that does not exist.

Minority interests sitting on a consolidated EBITDA

The third convention. Northvale consolidates a subsidiary it owns 75 percent of, which carries $45 million of non controlling interest.

The EBITDA of $118 million is consolidated, so it contains all of that subsidiary's earnings rather than three quarters of them. An enterprise value built on it therefore covers the whole subsidiary, which means the minority's claim has to be added.

Include it and enterprise value is 1,260 plus 190 plus 45, which is $1,495 million, or 12.67 times. Omit it and the same EBITDA reads 12.29 times, understating the multiple by 3.0 percent. On the valuation side, at the 10.8 times median, equity falls from $1,084.4 million to $1,039.4 million, so the price per share falls from $27.11 to $25.99.

One extra step goes with it. If the subsidiary is material, a buyer wants the multiple on the group's share of earnings rather than on the consolidated line. Strip out a quarter of that unit's EBITDA and the denominator falls, so the multiple rises again. Nobody publishes the unit's standalone EBITDA, which is why the balance sheet adjustment is the version that gets used.

The fourth convention is dilution, and it is worked in full on the DCF built step by step, where the same equity value supports three different share counts. Preferred stock behaves the same way: it is a claim ahead of the common, so it is added to enterprise value at its redemption value rather than its book value whenever the two differ.

The valuation interview questions about which method wins

1. Which method gives the highest value. Usually precedent transactions, because a control premium is baked into a completed deal price. Here the precedent median is two turns above the trading median. The ordering is a tendency and not a law, and inverted orderings happen when a sector reprices.
2. So should you average the three. No. Averaging a control price and a minority price produces a number that describes neither. Present a range per method and say which method answers the question being asked.
3. When does a DCF beat a multiple. When the near term cash profile is unusual, because a multiple assumes the peer set shares your shape. A company three years into a capital program has depressed cash flow and will look cheap on EBITDA and expensive on cash.
4. What makes a peer comparable. The cash flow shape, meaning growth, margin and capital intensity, rather than the industry label. One employer describes the task in its own requisitions as performing "complex valuation projects utilizing methods including comparable company analysis, precedent transactions, and discounted cash flow analysis", checked 1 October 2026 at its Workday portal. Of 119 requisitions read there, 36 name a discounted cash flow and 8 name comparables or precedents.

Two more things worth knowing about the employers who ask this. The same firm publishes its selection process in four named stages, checked 1 October 2026 at hl.com, and none of those stages is a valuation test. What is published is the process. What is asked inside it is not.

How a valuation answer gets weighted

Our synthesis rubric puts four weights on a recommendation, and the weights are ours. No bank publishes a marking scheme. The reasoning behind each weight sits on how an answer is assessed.