*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

- When is the midyear convention NOT appropriate to use?
- 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?
- Do you apply the midyear convention to a stub period? If yes, how?
- What is a stub period? When does the stub period arise when valuing a company using the DCF method?
- Does the midyear convention have a larger impact on the value of the business when the discount rate is higher or lower?
- What DCF assumptions have the most weight on your decision to use a midyear convention?
- How does midyear convention impact terminal value calculation?
- What is the midyear convention? When and why do we use the midyear convention?
- Do you account for business cycles when preparing a cash flow forecast? If yes, how?
- Why is normalization done?
- What are normalized earnings?
- How do you deal with onetime expenses and/or incomes in EBIT when dealing with cash flows?
- How do you capitalize R&D expenses?
- Why is expensing R&D expense not a good practice from a DCF valuation perspective?
- What is the difference between depreciation and amortization from a DCF valuation perspective?
- How do you convert an operating asset into a capitalized asset?
- How do you deal with operating leases when preparing cash flows for a DCF?
- Does the choice of currency of cash flows matter when valuing an international firm?
- What line items found in EBIT must you remove when preparing cash flows for a DCF?
- When would you use levered FCF when valuing a company using the DCF method?
- Why/When do you use unlevered FCF when valuing a company using the DCF method?
- 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

- What are the drawbacks of using book values in computing the weights of capital?
- Are country risk premiums a one-time task or does it need to be revised frequently?
- Which method of estimating the cost of equity do you use? Why?
- Do you use market value weights or book value weights of debt and equity to arrive at the weights when computing WACC?
- Are short-term debt and current portion of long-term debt included in debt when computing the weight of debt?
- What are Discount Rates? How will you explain it to a layman?
- Is there really a Risk-Free Rate?
- What is Market Risk Premium or MRP? How would you explain it to a layman?
- When do you need to iterate on the value of debt and equity?
- Is there an appropriate discount rate you must use?
- Does dividend payment impact the beta? If yes, how?
- Does the beta of a company provide any indication of the company’s valuation?
- What is Equity Beta?
- How would you apply country risk premiums on a global company/multinational company?
- How do you estimate country risk premiums? Name three methods to estimate country risk premiums.
- Has globalization over the last three decades enhanced risk and therefore the discount rates?
- What is the argument for NOT using a country risk premium?
- When do you use a country risk premium? What is the argument for using a country risk premium?
- Given the issues in estimating a market risk premium, can you suggest an alternative metric or method to arrive at risk premiums?
- What are the issues you face in estimating a market risk premium?
- How would you estimate risk-free rate when valuing an international firm?
- 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?
- What is the target debt ratio of a firm? How do you arrive at it?
- Does the cost of equity and cost of debt change in the projected years when arriving at the WACC? Yes/No? And why?
- Are the debt and equity weights used to estimate WACC the same every year in a DCF valuation model?
- How do you arrive at the market value of equity in a privately held business to estimate weights (to arrive at WACC)?
- How do you get the market value of debt if a company’s debt is partly or fully bank debt (not publicly traded)?
- What could be wrong in using market value weights to arrive at WACC? How can you fix it?
- What happens to valuation when off-balance sheet financing is added to the debt when computing WACC?
- Where does off-balance-sheet financing figure when computing WACC? Is it considered debt?
- 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

- What tax rates apply to a company you are considering valuing?
- What tax rate would you use if your company currently has operating losses.
- What tax rate would you use if your cash flows are international and have different tax rates in different jurisdictions?
- Can we use the actual tax paid to estimate future tax expenses?
- Why don’t we use the statutory tax rate in forecasting cash flows?
- What are the drawbacks of using an effective tax rate in forecasting cash flows?
- What are the drawbacks of using marginal tax rates in forecasting cash flows?
- 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

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

- What type of current assets are considered as part of current assets when computing working capital?
- Should you consider cash and cash equivalents as part of current assets when computing working capital?
- How is excess cash treated in your DCF valuation?
- What is excess cash? How do you estimate excess cash amounts?
- What types of liabilities are considered as part of current liabilities when computing working capital?
- 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

- What are the different ways you can estimate terminal value in a DCF valuation?
- What factors drive the percentage of your total value the terminal value represents?
- How can you check if your terminal assumptions are reasonable? (other than as a percentage of total value)
- Does increasing the revenue growth rate (not terminal growth rate) increase firm value? What could be wrong if you do that?
- 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?
- What are the draws backs of the liquidation (fire sale or orderly sale) approach to terminal value?
- What are the draws backs of the multiples approach to terminal value?
- What are the key principles you must stick with when deciding on the terminal growth rate you use in your DCF valuation?
- What are the draws backs of the perpetual growth approach to terminal value? How do you address this?
- Can the terminal growth rate in a perpetual growth rate method be negative? Why or Why not?
- Which method should you use to estimate terminal value in a DCF valuation?
- How can you check if your terminal assumptions are reasonable?
- What percentage of your total value does your terminal value usually represent?
- 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

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