“As a financial analyst, you're asked in an interview: "We use three main valuation methods — DCF, comparable companies, and precedent transactions. When do you trust one over the other, and why do banks run all three together?" Walk through how you'd answer that question, using a real example to show how the three methods can diverge and what that divergence tells you.”
As a financial analyst, you're asked in an interview: "We use three main valuation methods — DCF, comparable companies, and precedent transactions. When do you trust one over the other, and why do banks run all three together?" Walk through how you'd answer that question, using a real example to show how the three methods can diverge and what that divergence tells you.
Task: explain why DCF, comparable companies, and precedent transactions can produce different valuations for the same company, and demonstrate how to interpret that spread using a real example.
All three methods have been applied to the same target company, which generates $200m of EBITDA.
| Method | Implied Enterprise Value | Implied EV/EBITDA |
|---|---|---|
| Discounted Cash Flow (DCF) | $2,400m | 12.0x |
| Comparable Companies | $2,000m | 10.0x |
| Precedent Transactions | $2,600m | 13.0x |
Valuation Range = Highest Implied EV - Lowest Implied EV; Midpoint EV = Average of the Three Implied EVs
Using this formula, compute the valuation range and the midpoint Enterprise Value across the three methods.
Precedent Transaction Premium = (EV from Precedent Transactions / EV from Comparable Companies) - 1
Using this formula, compute the premium the precedent transactions multiple implies over the trading comps multiple.
Think about which of the three methods depends most on your own assumptions rather than observable market data, and which one embeds a control premium that the others don't.
Try answering out loud first — then reveal the model answer and compare.
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