Technical Questions - Highest and lowest value?
Let's start a new thread of technical questions for all those about to go throught the FT interview process. I'll start it off with one I received.
"Of the following valuation methodologies, which will typically give the highest and lowest value: DCF, comps, precedents, or LBO?"
A: High: Precedents Low: LBO
Which bank asked that question? Were those your answers or the ones the interviewer gave back as the "correct" ones? Also, I remember threads very similar to this one about half a year back. You may want to dig around the forums.
Out of DCF, comps and precedent acquisitions, the lowest is likely to be comps since it is based on the value of the marginal shares traded, whereas precedent acquisitions include a control premium. Since the DCF take into account all the CFs of the firms, it should also include such a premium.
LBO is not really a valuation methodology, it may give you an indication of the affordable valuation floor for relevant companies, the ones able to operate under high leverage.
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