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Valuation Q&A

  • Aug 04, 2025
  • Valuation Q&A

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1.What is Enterprise Value?

The Enterprise Value (EV) is calculated as :

 

EV = Market Value of Equity + Total Debt + Preferred Stock + Minority Interest – Cash

 

This calculation gives a comprehensive measure of a company’s total value, reflecting what it would cost to acquire the entire business, including its debt obligations, while adjusting for the cash it holds.

2.Why is cash subtracted in the Enterprise Value formula?

Cash and cash equivalents, such as short-term investments, commercial paper, and marketable securities, are highly liquid assets. They are subtracted from Enterprise Value because they reduce the cost of acquiring a company. It is assumed that the acquirer will use the company’s cash to pay off part of the purchase price or debt.

3.Why do we consider both Enterprise Value and Equity Value?

Enterprise Value represents the total value of a company attributable to all investors—both debt and equity holders—while Equity Value reflects only the portion available to equity shareholders.

 

We consider both because Equity Value is the figure that’s visible to the public through the stock market, whereas Enterprise Value provides a more comprehensive view of the company’s true value, especially in the context of mergers, acquisitions, or overall valuation analysis.

4.What does it indicate if a company has a negative Enterprise Value?

A company may have a negative Enterprise Value when it holds very large cash reserves, has a very low market capitalization, or a combination of both.

 

This situation is often seen in companies that are struggling financially or nearing bankruptcy, or in financial institutions like banks that maintain significant cash balances on their balance sheets.

5.How would you value a company?

There are three widely used valuation methods

 

  1. Trading Multiples Approach (also known as “Comps”) – This method involves valuing a company based on how similar companies in the same industry are trading. Common ratios include P/E, EV/EBITDA, and EV/Revenue, applied to the company’s own financial metrics.
  2. Precedent Transactions Approach (also called “Transaction Comparables”) – Here, one assesses the value of a company by analyzing recent M&A or fund raise deals involving comparable businesses within the same sector.
  3. Discounted Cash Flow (DCF) Method – This approach values a company based on the present value of its projected future cash flows, using a suitable discount  rate to reflect the time value of money and associated risk.

 

Each method offers a different perspective, and in practice, a combination of these approaches is often used to arrive at a valuation range.

6. What is the formula for calculating WACC?

The formula for WACC (Weighted Average Cost of Capital) is:

 

WACC = (Cost of Equity × % Equity) + (Cost of Debt × % Debt × (1 – Tax Rate))

 

The Cost of Equity is typically calculated using the Capital Asset Pricing Model (CAPM), which is: Cost of Equity = (Risk-Free Rate) + (Beta × Equity Risk Premium)

 

  • The Risk-Free Rate is usually based on the yield of a 10-year or 20-year U.S. Treasury bond.
  • Beta measures the stock’s volatility relative to the market and is derived from comparable companies.
  • The Equity Risk Premium represents the expected return of the market over a risk-free asset.

 

The Cost of Debt is the effective interest rate a company pays on its debt, and it is adjusted for tax benefits, since interest is tax-deductible.

 

The proportions of equity and debt refer to their respective weights in the company’s overall capital structure.

7. There are two identical companies, P and Q, but the key difference is that P has debt in its capital structure, while Q is entirely equity-financed. Which company would have a higher WACC?

In this case, Company Q would have a higher WACC, since debt is generally cheaper than equity. Debt also provides a tax shield due to interest being tax-deductible, which further lowers the overall cost of capital for Company P.

8.Why is debt considered cheaper than equity?

Debt is less risky for Debt Investors, since they get a fixed return. Also, in the event of liquidation or bankruptcy, debt holders have priority over equity holders. Because of this lower risk, interest rates on debt are typically lower than the expected returns demanded by equity investors.

 

Further, interest on debt is tax-deductible, thus further reducing the cost of debt. 

9.In what situations would you avoid using a DCF for valuation?

A Discounted Cash Flow (DCF) analysis is not ideal when a company has highly unpredictable or unstable cash flows, or when debt and working capital play fundamentally different roles than they do in most companies.

 

For instance, in the case of financial institutions like banks, debt is more of an operational tool rather than a source of financing, and working capital is a core part of their business model. Because of these structural differences, using a DCF for such companies is generally inappropriate.

10.What are the most commonly used valuation multiples?

Valuation-related questions are among the most frequently asked in investment banking interviews.

 

Here are some of the most widely used relative valuation multiples:

 

  • EV/Revenue
  • EV/EBITDA
  • EV/EBIT
  • Price-to-Earnings (P/E)
  • Price-to-Book Value (P/BV)

 

These multiples help compare a company’s valuation relative to its peers based on financial performance and market metrics.

11.Briefly explain a Leveraged Buyout (LBO)

A Leveraged Buyout (LBO) occurs when a company or investor acquires another company primarily using borrowed funds, such as loans or bonds, rather than equity.

 

The assets of the company being acquired typically serve as collateral for the debt.
 In many cases, the debt-to-equity ratio in an LBO can be as high as 90:10, meaning only a small portion of the purchase is financed with equity.

 

However, if the debt level exceeds a sustainable threshold, it can significantly increase the risk of bankruptcy.

12 . Two companies have the same revenue and EBITDA, but one has a customer retention rate of 95% and the other 70%. Should they be valued equally?

No. The company with 95% retention has more predictable and recurring revenue, which implies lower customer acquisition costs (CAC) and higher LTV (lifetime value). This results in better cash flow visibility and likely warrants a higher EV/EBITDA or EV/Sales multiple.
Example: In SaaS, high net revenue retention (>120%) leads to multiples of 10x+ revenue; lower retention firms may only get 3–5x.

13. You're valuing a cyclical company (e.g., steel, auto). Last year was a peak cycle with 25% EBITDA margin, but the 5-year average is 15%. Which year’s numbers will you use in your comps or DCF?

Use normalized EBITDA based on the cycle average (15%), not peak margins. Otherwise, we will overvalue the company by capitalizing unsustainable profits.
In DCF, we need to smooth margins and adjust working capital accordingly. In comps, also we need to check whether peer multiples reflect normalized or peak metrics.
This demonstrates sound judgment and understanding of mean reversion in cyclical businesses.

14. A consumer company has ₹300 Cr in EBITDA, ₹100 Cr in net debt, and is being valued at 12x EV/EBITDA. What is the Equity Value of the company?

  1. Enterprise Value (EV) = EBITDA × Multiple
     = ₹300 Cr × 12 = ₹3,600 Cr
  2. Equity Value = Enterprise Value – Net Debt
     = ₹3,600 Cr – ₹100 Cr = ₹3,500 Cr

 

So, the Equity Value is ₹3,500 Cr. This is the value available to shareholders after settling debt.

15. Tell me about a deal you have followed.

One recent deal I followed was ChrysCapital’s ₹2,878 crore acquisition of a majority stake in Theobroma, a premium QSR and bakery chain. This is significant because it reflects growing private equity interest in India’s organised food retail segment, especially in high-margin, scalable consumer brands. Theobroma has built strong customer loyalty and brand recall, and ChrysCapital sees potential to scale it pan-India through store expansion and supply chain optimisation.

 

What stood out was the valuation—estimated around 20–25x EBITDA, reflecting the premium attached to profitable, brand-driven QSR businesses. It also signals PE’s confidence in India’s rising discretionary consumption and shift toward formalised dining.

41.How do you calculate terminal value?

Terminal Value (TV) represents the estimated value of a business beyond the forecast period, and it is a crucial component of Discounted Cash Flow (DCF) analysis. There are two common methods to calculate terminal value: the perpetual growth method and the exit multiple method.

 

  • The perpetual growth method assumes that the company’s free cash flows will grow at a constant rate indefinitely. This is suitable for businesses expected to continue operating long term with stable growth.
  • The exit multiple method estimates terminal value by applying a valuation multiple (like EV/EBITDA) to the company’s financials at the end of the projection period. This approach is often used when the company is expected to be sold or liquidated, and doesn’t assume infinite growth.

42.How do you perform a DCF valuation?

At a high level, a Discounted Cash Flow (DCF) valuation estimates the value of a company based on how much it is expected to generate in future cash flows, typically over a 5- to 20-year period, followed by a terminal value representing the value beyond that timeframe.

 

To conduct a DCF analysis:

 

  1. Project the company’s unlevered free cash flows, which exclude the effects of debt.
  2. Determine an appropriate discount rate, usually the Weighted Average Cost of Capital (WACC).
  3. Calculate the terminal value using either the perpetual growth method or exit multiple method.
  4. Discount both the projected cash flows and terminal value to present value using the chosen discount rate. This gives you the Enterprise Value.
  5. Finally, subtract net debt (total debt minus cash) from the Enterprise Value to arrive at the company’s Equity Value.

43.What is Beta, and why would you unlever it?

Beta (β) is a measure of a security’s volatility relative to the overall market, typically benchmarked against a broad index like the S&P 500. A beta of 1.0 means the asset moves in line with the market, while a beta above 1.0 indicates higher volatility and greater risk, and a beta below 1.0 suggests lower volatility.

 

Unlevering beta is important when analyzing or comparing a company—especially one that is not publicly traded or has a different capital structure. By removing the effects of debt, an unlevered beta reflects the pure business risk of the company’s equity, giving a clearer view of its underlying volatility independent of financial leverage.

44.What is an IPO?

An IPO, or Initial Public Offering, is the process through which a private company becomes publicly traded by offering its shares to investors for the first time. Investment banks typically assist with this process by underwriting and marketing the offering.

 

Often referred to as “going public,” an IPO helps the company raise capital for growth and gives early investors, founders, and employees an opportunity to monetize their holdings by selling shares in the open market.

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