Case 35 / 183 Entry

Three Valuation Methods

Valuation & DCF

The prompt

“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.”

📋 What you're given

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.

1. Task Overview

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.

Step 1: Given Data — One Company, Three Methods

All three methods have been applied to the same target company, which generates $200m of EBITDA.

MethodImplied Enterprise ValueImplied EV/EBITDA
Discounted Cash Flow (DCF)$2,400m12.0x
Comparable Companies$2,000m10.0x
Precedent Transactions$2,600m13.0x

Step 2: Valuation Range

Show Valuation Range Formula

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.

Step 3: Precedent Transaction Premium

Show Precedent Transaction Premium Formula

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.

Step 4: Weighing the Three Methods

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.

💡 Model answer

Try answering out loud first — then reveal the model answer and compare.

⚠️ Common mistakes

  • Treating the three methods as if they should converge on the same number — a wide range is expected, not a red flag.
  • Using precedent transaction multiples without adjusting for the control premium they embed, which overstates a standalone trading valuation.
  • Picking a cherry-picked comp set or precedent deal set that happens to support a predetermined valuation, instead of a defensible peer group.
  • Relying on a single DCF output without sensitizing WACC and terminal growth, given how much the result swings with small changes in those assumptions.
  • Forgetting that precedent transactions go stale — a deal struck two rate cycles ago is a weak comparable today.

🔁 Follow-up questions

Previous Case 34: "Is 20x P/E Expensive?" Next Case 36: WACC: The Building Blocks

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