Note: We list only valuation-related technical questions we have seen in private equity and investment banking over the last 12 years. We have avoided fit/personality questions.

List of Interview Questions By Category

Cash Flows * Risk & Discount Rates * Taxes * Growth * Other Valuation Topics * Terminal Value * Working Capital

Cash Flows Related Questions in Private Equity & Investment Banking Interviews

  1. When is the midyear convention NOT appropriate to use?
  2. If you had access to depreciation and amortization cash flows as computed in the IRS code/tax books or those reported in the financial accounting/reporting books choice, which one would you prefer to use?
  3. Do you apply the midyear convention to a stub period? If yes, how?
  4. What is a stub period? When does the stub period arise when valuing a company using the DCF method?
  5. Does the midyear convention have a larger impact on the value of the business when the discount rate is higher or lower?
  6. What DCF assumptions have the most weight on your decision to use a midyear convention?
  7. How does midyear convention impact terminal value calculation?
  8. What is the midyear convention? When and why do we use the midyear convention?
  9. Do you account for business cycles when preparing a cash flow forecast? If yes, how?
  10. Why is normalization done?
  11. What are normalized earnings?
  12. How do you deal with onetime expenses and/or incomes in EBIT when dealing with cash flows?
  13. How do you capitalize R&D expenses?
  14. Why is expensing R&D expense not a good practice from a DCF valuation perspective?
  15. What is the difference between depreciation and amortization from a DCF valuation perspective?
  16. How do you convert an operating asset into a capitalized asset?
  17. How do you deal with operating leases when preparing cash flows for a DCF?
  18. Does the choice of currency of cash flows matter when valuing an international firm?
  19. What line items found in EBIT must you remove when preparing cash flows for a DCF?
  20. When would you use levered FCF when valuing a company using the DCF method?
  21. Why/When do you use unlevered FCF when valuing a company using the DCF method?
  22. How do you determine the length of the forecast period in your DCF valuation model?

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Discount Rates and Risk Related Questions in Private Equity & Investment Banking Interviews

  1. What are the drawbacks of using book values in computing the weights of capital?
  2. Are country risk premiums a one-time task or does it need to be revised frequently?
  3. Which method of estimating the cost of equity do you use? Why?
  4. Do you use market value weights or book value weights of debt and equity to arrive at the weights when computing WACC?
  5. Are short-term debt and current portion of long-term debt included in debt when computing the weight of debt?
  6. What are Discount Rates? How will you explain it to a layman?
  7. Is there really a Risk-Free Rate?
  8. What is Market Risk Premium or MRP? How would you explain it to a layman?
  9. When do you need to iterate on the value of debt and equity?
  10. Is there an appropriate discount rate you must use?
  11. Does dividend payment impact the beta? If yes, how?
  12. Does the beta of a company provide any indication of the company’s valuation?
  13. What is Equity Beta?
  14. How would you apply country risk premiums on a global company/multinational company?
  15. How do you estimate country risk premiums? Name three methods to estimate country risk premiums.
  16. Has globalization over the last three decades enhanced risk and therefore the discount rates?
  17. What is the argument for NOT using a country risk premium?
  18. When do you use a country risk premium? What is the argument for using a country risk premium?
  19. Given the issues in estimating a market risk premium, can you suggest an alternative metric or method to arrive at risk premiums?
  20. What are the issues you face in estimating a market risk premium?
  21. How would you estimate risk-free rate when valuing an international firm?
  22. Do the CAPM, Fama-French, APM and multi-factor models methods of estimating the cost of equity generally overestimate or underestimate the equity cost? Why?
  23. What is the target debt ratio of a firm? How do you arrive at it?
  24. Does the cost of equity and cost of debt change in the projected years when arriving at the WACC? Yes/No? And why?
  25. Are the debt and equity weights used to estimate WACC the same every year in a DCF valuation model?
  26. How do you arrive at the market value of equity in a privately held business to estimate weights (to arrive at WACC)?
  27. How do you get the market value of debt if a company’s debt is partly or fully bank debt (not publicly traded)?
  28. What could be wrong in using market value weights to arrive at WACC? How can you fix it?
  29. What happens to valuation when off-balance sheet financing is added to the debt when computing WACC?
  30. Where does off-balance-sheet financing figure when computing WACC? Is it considered debt?
  31. What kinds of liabilities are included in debt when computing the weight of debt (used in computing WACC)?

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Tax Related Questions in Private Equity & Investment Banking Interviews

  1. What tax rates apply to a company you are considering valuing?
  2. What tax rate would you use if your company currently has operating losses.
  3. What tax rate would you use if your cash flows are international and have different tax rates in different jurisdictions?
  4. Can we use the actual tax paid to estimate future tax expenses?
  5. Why don’t we use the statutory tax rate in forecasting cash flows?
  6. What are the drawbacks of using an effective tax rate in forecasting cash flows?
  7. What are the drawbacks of using marginal tax rates in forecasting cash flows?
  8. Which tax rate should you choose in preparing a DCF cash flow?

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Growth Related Questions in Private Equity & Investment Banking Interviews

  1. How does the reinvestment rate impact the value of a business in DCF valuation when the business is NOT profitable?
  2. Could a company with high growth rates have low valuations? Why?
  3. Are higher revenue growth rates always good (leading to higher valuation)?
  4. What are excess returns? What drives excess returns?
  5. How does the reinvestment rate impact the value of a business in DCF valuation when the business is profitable?
  6. When are the sustainable growth rates and operating income growth rates equal?
  7. Can use the sustainable growth rate equation to grow revenues? If not, how do you estimate revenue growth rates?
  8. Can you use the sustainable growth rate equation to grow operating income? If yes, what is the formula? If not, how do you estimate operating income growth rates?
  9. Will a company grow at the sustainable growth rate? Is that the growth rate I should use in my DCF valuation?
  10. How does the equation of sustainable growth rate feature in a DCF valuation?

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Working Capital Related Questions in Private Equity & Investment Banking Interviews

  1. What type of current assets are considered as part of current assets when computing working capital?
  2. Should you consider cash and cash equivalents as part of current assets when computing working capital?
  3. How is excess cash treated in your DCF valuation?
  4. What is excess cash? How do you estimate excess cash amounts?
  5. What types of liabilities are considered as part of current liabilities when computing working capital?
  6. Is short-term debt showing up as part of current liabilities included in working capital when estimating cash flows in a DCF valuation?

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Terminal Value Related Questions in Private Equity & Investment Banking Interviews

  1. What are the different ways you can estimate terminal value in a DCF valuation?
  2. What factors drive the percentage of your total value the terminal value represents?
  3. How can you check if your terminal assumptions are reasonable? (other than as a percentage of total value)
  4. Does increasing the revenue growth rate (not terminal growth rate) increase firm value? What could be wrong if you do that?
  5. Should you use the real rates of growth vs. nominal rate of growth when estimating terminal growth rates when using the perpetual growth rate method?
  6. What are the draws backs of the liquidation (fire sale or orderly sale) approach to terminal value?
  7. What are the draws backs of the multiples approach to terminal value?
  8. What are the key principles you must stick with when deciding on the terminal growth rate you use in your DCF valuation?
  9. What are the draws backs of the perpetual growth approach to terminal value? How do you address this?
  10. Can the terminal growth rate in a perpetual growth rate method be negative? Why or Why not?
  11. Which method should you use to estimate terminal value in a DCF valuation?
  12. How can you check if your terminal assumptions are reasonable?
  13. What percentage of your total value does your terminal value usually represent?
  14. Can your terminal growth rate be higher than the economy’s growth rate? or GDP growth rate?

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Other Valuation Related Questions in Private Equity & Investment Banking Interviews

  1. How does it matter if the company pays for acquisitions using cash, stock or both when estimating cash flows for a valuation?
  2. How are acquisition costs forecasted for a company that has a history of acquisitions?
  3. What are the Essential Ingredients of a DCF Valuation Model?
  4. What are Three-Stage or Multi-Stage Models?
  5. What is the Lifetime of a Business? How many years do we need to forecast financials?
  6. How is the liquidity discount arrived at?
  7. When is a liquidity discount appropriate?
  8. When is a private company discount irrelevant?
  9. What conditions make a control premium irrelevant?
  10. What additional liabilities must you consider after you have valued a firm using the DCF method?
  11. Where does a majority holding feature in your DCF valuation? Do you need any adjustments to account for the minority holdings?
  12. Where does minority interest feature in your DCF valuation?
  13. What additional assets must you consider after you have valued a firm using the DCF method?
  14. What could you have missed out on if you did a DCF valuation?
  15. How can you estimate the probability of bankruptcy of a firm?
  16. How can you feature the risk of bankruptcy in your DCF model?
  17. What are the drawbacks of the adjusted present value (APV) (if any)?
  18. How is the adjusted present value (APV) method different from your standard DCF -WACC method?
  19. Why would you consider the adjusted present value (APV) method of valuation?
  20. Are enterprise value multiples considered better than equity multiples?
  21. What factors help you decide which multiple to use in multiples-based valuations?
  22. Is Valuation based on Multiples a Valid Valuation method?
  23. Why is the DCF valuation method the most used method in valuation?
  24. What types of companies are good candidates for running a DCF valuation?

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