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.
Why Do Bond Prices Fall When Interest Rates Rise? Duration and Convexity Explained
Why do bond prices fall when interest rates rise? The inverse relationship, duration and convexity explained with a worked five-year bond example.
How to Calculate Bond Duration and Price Sensitivity: A Step-by-Step Interview Walkthrough
Price a bond, calculate Macaulay and modified duration, then estimate the price move from a 100 bp yield rise. Step-by-step interview walkthrough.
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
Bond Basics: Duration, Yield, Price
As a debt capital markets analyst, you are tasked with explaining to a client why the price of their five-year corporate bond falls when market yields rise, quantifying how far it falls using duration, and showing why that duration estimate is not quite the whole story.