How to Give Valuation Interview Questions With Answers

Q1- How can you figure out how many diluted shares are in outstanding?

Suggested Answer: Add the dilution from options, convertibles, and other securities to the basic number of shares that are now outstanding. You will use a formula known as the Treasury Stock Formula. Take the number of options and the exercise price into consideration; if the exercise price is higher than the share price, there is no dilution because the options cannot be exercised; otherwise, take the number of options into consideration and deduct the exercise price from the options times the exercise price. Following the division by Share Price, you will arrive at the amount of money received by the company.


Q2- When Does when EPS Become Negative?

Suggested Answer: It is possible for a firm to have negative earnings per share if its income is negative. This indicates that the company is either losing money or spending more than it is generating at the moment. Even if a stock has a negative EPS, this does not always indicate that the stock should be sold.


Q3- Explain me what's included in net debt?

Suggested Answer: The total net debt takes into account all forms of debt, including those with short-term and long-term maturities, loans, and bonds. Other financial claims that are not equivalent to equity, such as preferred stock and non-controlling interests, are included in this category. To determine the level of net debt, start by subtracting cash and any other non-operating assets, such as equity investments and short-term investments, from the total amount of gross debt. This will give you the level of net debt.


Q4- How Net Share Settlement Calculation of Fully Diluted Shares Outstanding?

Suggested Answer: Providing in-the-money convertible holders with cash rather than shares is one method for settling in-the-money converts.

amount of convertibles outstanding/conversion price=incremental shares X current share price=total conversion value-par value of amount outstanding=excess over par value/share price=incremental new shares


Q5- What is the definition of a valuation multiple?

Suggested Answer: The usage of valuation multiples is the easiest approach to determine the value of a firm, and they are helpful when comparing businesses in the same industry (comparable company analysis). They make an effort to capture many of the operating and financial aspects of a company (for example, predicted growth) in a single number that can be multiplied by a certain financial indicator (for example, EBITDA) to arrive at an enterprise or equity value. The multiple is calculated as a ratio of the amount of capital invested to a financial indicator that is attributed to the providers of that capital.


Q6- A company trades at a 10x EV/EBITDA value ratio (based on its Current Enterprise Value). What exactly does that indicate?

Suggested Answer: This number has no significance whatsoever when taken by itself. It only has significance in connection to other companies and the multiples of those companies. For instance, if other companies in the same industry that are seeing growth rates that are comparable to those of this company are trading at multiples of 10x EV/EBITDA, then this company may be overvalued.


Q7- Which operational metric is most likely to have the closest correlation with EV/EBITDA multiples?

Suggested Answer: The EV/EBITDA multiples are most likely to be connected with the EBITDA growth rates because the value of a firm is dependent on its CF, CF growth rate, and Discount Rate.

The increase of EBITDA is still closer to the growth of CF than the growth of sales is.

The association between revenue growth and EV/Revenue multiples is expected to be stronger than the correlation between revenue growth and EV/EBITDA multiples. However, there may be some correlation between the two.


Q8- What is the definition of market capitalization?

Suggested Answer: Current stock price multiply number of shares outstanding


Q9- What are the advantage of preferred stock?

Suggested Answer: Guaranteed Dividend Payments, Priority Over Common Stockholders, Priority In The Event Of Liquidation And Bankruptcy, Low Risk In Comparison To Other Forms Of Investment, etc. are some of the benefits that come along with holding preferred stock.


Q10- What method would you use to forecast revenue?

Suggested Answer:

  • The availability of Resources

  • The availability of Resources - The Significance of the Forecast (how important is it that it is extremely accurate)

  • The availability of historical data - The availability of historical data; - The length of time covered by the forecast; - The ability to explain the forecast



Q11- What is the difference between the NPV and XNPV Excel functions?

Suggested Answer:

A series of cash flows and a discount rate are input into the NPV function, which then determines the net present value of the investment. The NPV calculation works under the assumption that payments will be made in equal intervals at regular intervals. The argument to the function is written as =NPV(rate, [value 1], [value 2],...), where rate is the discount rate applied across the duration of the period and value 1, value 2,... are a series of numeric values that indicate a series of payments and income. The NPV function is not nearly as precise as the XNPV function, which is due to the fact that the XNPV function takes into consideration the specific dates on which each of the cash flows occurs. This function calls for the input of a discount rate, a string of cash flows, and a string of dates that correspond to each cash flow in the string. When valuing a security, investment, or company, the XNPV function provides a more accurate net present value than the NPV function does because it takes into account the time value of money, whereas the NPV function does not. The function argument for the XNPV function is written as =XNPV(Rate, Cash Flows, Dates of Cash Flow).


Q12- What is a sensitivity analysis and how do you do it in Excel?

Suggested Answer:

  1. In our model, copy and paste the assumptions from each of the different possible scenarios.

  2. Make a dropdown menu from which we may choose amongst the several instances.

  3. Establish connections between the actual situation and the various hypotheses.

  4. To validate the results of the model, select a variety of hypothetical situations.

Q13- What do you think creates a solid financial model, in your opinion?

Suggested Answer: A quality financial model would, without a doubt, be error-free, in addition to being highly straightforward and simple to read and comprehend. Because of this, the model will become less difficult to browse, check, and rely on as a result of these principles.


Q14- During the normalisation process, what kinds of changes are required?

Suggested Answer: The inventory accounting policies of the company in question are two significant difficulties that are tied to the possibility of normalisation modifications for inventory products.


Q15- Which of the following best describes shareholders' equity?

Suggested Answer: The amount of equity a Company has is equal to the difference between its assets and liabilities.


Q16- What are the reasons for preparing balance sheet normalisation adjustments?

Suggested Answer: The purpose of normalisation adjustments is to exclude items from the subject company's financial statements that are either highly unlikely to occur again in the foreseeable future or have no bearing on the company's day-to-day business operations.


Q17- How can you tell whether a DCF depends too much on future assumptions?

Suggested Answer: Some individuals believe that the DCF is unreliable because it is too dependent on future assumptions if more than fifty percent of a company's value is derived from the current value of the Terminal Value.

The challenge, however, is that in actual fact, this is the case in virtually all DCF. If the present value of the Terminal Worth accounts for something like 80–90% or more of the total value of the company, then perhaps you need to reevaluate the assumptions that you have made.


Q18- How do you see if your assumptions for Terminal Value are correct?

Suggested Answer: Calculate the Terminal Value assuming that the long-term growth rate will be 4%. Terminal Value is $10,000. When you split that Terminal Value by the EBITDA of the last year, you get an inferred EBITDA multiple of 15x; yet, the public comparables are only selling at a median of 8x EBITDA right now. If this is the case, then the growth rate that you are assuming for the long run is almost probably unrealistically high, and you should consider lowering it.


Q19- Does it make sense to use the Multiples Method vs. the Gordon Growth Method?

Suggested Answer: Calculating Terminal Value in DCF nearly usually requires the use of the Multiples Method in the banking industry.

Due to the fact that they are based on comparable companies, accurate data for exit multiples are much simpler to obtain.

Estimating a growth rate over the long run requires more speculation.

You should consider using Gordon Growth if you do not have any comparable companies or if you feel that multiples may shift considerably in the industry in the next several years.


Q20- What's the connection between debt and equity cost of capital?

Suggested Answer: The cost of debt is equal to the interest rate that bondholders want, while the cost of equity is equal to the rate of return that shareholders anticipate receiving on their investment. The equity in a company does not have to be paid back or returned, but it is typically worth more than the debt. Because the cost of equity is higher than the cost of debt, it results in a higher rate of return.




Q21- Which of two identical companies, one with debt and the other without, will have the greater WACC?

Suggested Answer: Due to the fact that debt is "cheaper" than equity, the entity that does not have any debt will have a WACC that is higher up to a certain point. Why? Deductions can be made for interest paid on debt. The ranking of debt is above that of equity. In most cases, the cost of debt has a lower interest rate than the cost of equity.


Q22- Why is it necessary to include Noncontrolling Interests in the Enterprise Value calculation?

Suggested Answer: To get at the Enterprise Value, you are going to need to include the Noncontrolling Interest. This is because you want both the numerator and the denominator to reflect 100 percent of the majority-owned subsidiary. If you did not do that, the numerator would reflect a percentage of the corporation that is less than 100 percent, while the denominator would show the full 100 percent.


Q23- How do you calculate value of diluted shares and diluted equity?

Suggested Answer: Add the effect of stock options and other dilutive securities, such as warrants, convertible debt, and convertible preferred stock, to the basic share count after taking into account their potential to reduce the number of outstanding shares.

You will need to apply the Treasury Stock Method in order to calculate the effect of dilution.


Q24- Why do we bother calculating share dilution? Is there a significant difference?

Suggested Answer: We do this for the same purpose that we calculate Enterprise Value, which is to get a more precise estimate of how much it will cost to buy a company.


Q25- Why do you deduct Cash from the Enterprise Value formula? Is this usually the case?

Suggested Answer: When a firm is acquired, the buyer would "receive" the cash that the seller has on hand, which results in the buyer effectively paying less for the company dependent on how much cash it has on hand. Keep in mind that Enterprise Value is the indicator that shows us how much you would actually have to "pay" to purchase another company. It is not always correct because, technically speaking, you should deduct just extra cash. This refers to the sum of money that a firm has in excess of the very minimum amount that is required for it to continue operations. In actuality, however, determining the minimal amount of cash that a firm needs to operate is challenging. Furthermore, because you want the computation of Enterprise Value to be reasonably consistent across various organizations, you typically just deduct the full cash balance from the total.


Q26- When calculating enterprise value, is it always accurate to add debt to equity value?

Suggested Answer: Because the terms of a debt issuance typically indicate that debt must be repaid within an acquisition, the answer is typically yes to this question. It is true to state that the seller's debt "adds" to the buying price because the buyer typically pays off the seller's debt after the sale. If you added it for some companies but not for others, Enterprise Value would no longer imply the same thing, and valuation multiples would be wrong. Adding debt is therefore a partial question of standardising the calculation of Enterprise Value among various companies.


Q27- Is it possible for a business to have a negative Enterprise Value?

Suggested Answer: Yes. It indicates that the company has a cash balance that is extraordinarily high or that its market capitalization is extremely low (or both). It happens frequently with businesses that are on the verge of going bankrupt, and it also occurs occasionally with businesses that have tremendous cash reserves.


Q28- Is it possible for a firm to have a negative equity value? What exactly does that imply?

Suggested Answer: No. This is not