Ask any finance interviewer how to value a company and you'll get the same three-part answer: discounted cash flow (DCF), comparable companies analysis (trading comps), and precedent transactions analysis. Candidates can usually name all three. Far fewer can explain why they almost never produce the same number — and interviewers use that gap to separate people who memorized the definitions from people who actually understand valuation.

Three Methods, Three Different Questions

The reason DCF, comps, and precedents diverge isn't measurement error. Each method is answering a genuinely different question about the same company.

Discounted cash flow asks: what is this business worth based purely on the cash it's projected to generate, discounted back at a rate that reflects its risk? It's the most theoretically "pure" method because it doesn't depend on how the market happens to be pricing anything else. That purity is also its weakness — every input (revenue growth, margins, the discount rate, the terminal growth rate) is an assumption the analyst has to defend, and small changes in those assumptions swing the output enormously.

Comparable companies analysis asks: what is the market currently paying for similar, publicly traded businesses? Instead of forecasting the future, you're reading a price off the market today — typically as a multiple of EBITDA, revenue, or earnings. That makes comps fast and grounded in real, observable data, but it also means comps inherit whatever mood the market is in. In a hot market, every comp looks expensive; in a downturn, the whole peer set gets cheap together.

Precedent transactions analysis asks: what have acquirers actually paid to buy full control of similar companies in the past? Because these are real, completed deals, the multiples are grounded in cash that actually changed hands. But they carry a control premium — an acquirer buying 100% of a company and gaining control typically pays more per share than the stock trades at in the public market — and they're backward-looking, so a deal from a very different rate environment can be a weak comparable today.

Why the Gap Between Them Matters More Than Any Single Number

Because each method measures something slightly different, banks don't pick one and discard the other two — they run all three and look at the spread between them. A worked example makes this concrete: in this case walking through a company valued three ways, the same business comes out to a $2,000m enterprise value on comps, $2,400m on DCF, and $2,600m on precedent transactions — a $600m range that is entirely explained by what each method is actually pricing, not by anyone making a mistake.

That range is what feeds into a "football field" chart, the horizontal bar chart bankers use to present a valuation range rather than a single point estimate. Presenting a range, built from methods that measure genuinely different things, is more defensible to a client or board than presenting one number and asking them to trust it.

When Each Method Deserves More Weight

In practice, the weighting shifts with context. A fairness opinion, where a board needs a defensible, neutral view of value, tends to lean on a blend of DCF and comps. A sell-side M&A process, where the goal is to show a seller the strongest supportable price, will often highlight precedent transactions and the DCF's upside case. A business with volatile or hard-to-forecast cash flows makes DCF less reliable and pushes more weight onto comps. Understanding this context is exactly what separates a candidate who has memorized "DCF, comps, precedents" from one who understands valuation.

Before comparing methods, it helps to be precise about what's actually being compared — see this case on why Enterprise Value, not market capitalization, is the right basis for comparison in the first place, since every method above is typically expressed as a multiple of Enterprise Value.

The Takeaway

DCF, comparable companies, and precedent transactions aren't three attempts at the same answer — they're three different lenses on the same company, and the distance between what they show you is information, not noise. Interviewers ask about all three specifically to see whether you understand that distinction.