Valuation – Valuation Methodologies
Articles
What Makes a P/E Ratio "Expensive"? A Framework for Judging Multiples
A 20x P/E ratio isn't inherently expensive or cheap. Learn the growth (PEG), industry, and interest-rate framework analysts actually use to judge a valuation multiple.
DCF vs. Comparable Companies vs. Precedent Transactions: What's the Difference?
DCF, comparable companies, and precedent transactions each value a company differently. Here's what each method actually measures and why their outputs diverge.
"Which Valuation Method Do You Trust Most?" — How to Answer This in an Interview
A step-by-step framework for the classic DCF vs. comps vs. precedents interview question, with a worked numerical example you can reuse on the spot.
What Is Sum-of-the-Parts (SOTP) Valuation and Why Does It Matter?
A breakdown of how sum-of-the-parts valuation works for conglomerates, why blended multiples mislead, and what the conglomerate discount tells investors.
How to Answer a Sum-of-the-Parts Valuation Question in an Interview
A step-by-step framework for tackling SOTP valuation interview questions: segmenting the business, picking peer multiples, and bridging to equity value.
What Is IRR-Based Pricing in Private Equity? The PE Approach to Valuation
Private equity funds don't value targets the way equity analysts do. Learn how PE firms work backward from a target IRR to set the maximum price they can pay for a deal.
How to Calculate the Maximum Price to Pay for an LBO Target (Interview Walkthrough)
Step-by-step interview walkthrough for the classic PE question: back into the maximum entry multiple a fund can pay for a target given its IRR hurdle.
What Is the Conglomerate Discount? Why Diversified Companies Trade Below Their Parts
The conglomerate discount explained: why diversified companies often trade for less than the sum of their business segments, and why activist investors target it.
How to Calculate a Sum-of-the-Parts (SOTP) Valuation, Step by Step
A step-by-step walkthrough of building a sum-of-the-parts (SOTP) valuation for a multi-segment company, including the conglomerate discount, for interview prep.
What Are M&A Synergies? Revenue Synergies vs. Cost Synergies Explained
A clear breakdown of M&A synergies: what revenue and cost synergies actually are, why cost synergies are more reliable, and why interviewers care so much about this distinction.
How to Value M&A Synergies in an Interview: A Step-by-Step Framework
The exact step-by-step framework for valuing M&A synergies in a finance interview: ramping, risk-adjusting, taxing, discounting, and comparing to the deal premium.
Why Do DCF, Comps, and Precedent Transactions Give Different Valuations?
DCF, trading comps, and precedent transactions rarely agree on a company's value. Here's why each method sees something different — and what the gap actually means.
How to Reconcile Conflicting Valuation Methods in an Interview Answer
Interviewers love asking what you do when DCF, comps, and precedent transactions disagree. A structured framework — with a worked example and common mistakes to avoid.
Cases
"Is 20x P/E Expensive?"
As a financial analyst, you're asked in an interview: "Is a 20x P/E ratio expensive?" Walk through how you'd answer that question, using growth, industry, and the interest rate environment to give the number context.
Three Valuation Methods
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.
Sum-of-the-Parts Valuation
Breaking apart a conglomerate, segment-level multiples
How PE Thinks About Valuation
As a private equity associate, you are tasked with determining the maximum entry multiple your fund can pay for a target today, working backward from the fund's target IRR rather than forward from a standalone valuation.
Conglomerate Discount
As an equity research analyst, you are tasked with calculating the sum-of-the-parts (SOTP) value of a diversified conglomerate and determining whether — and by how much — the stock trades at a discount to that value, the gap activist investors typically target.
Synergy Valuation
As an M&A analyst, you are tasked with valuing the expected synergies in a proposed acquisition — risk-adjusting them for realization probability, taxing them appropriately, discounting them to present value — and using that figure to judge whether the price your company is paying for those synergies is actually justified.
When Valuation Methods Conflict
Reconciling DCF vs. comps vs. precedents: what the gap tells you