Hi Guys,
I was asked the following question in an internship interview recently and still don't feel like I have fully understood it: "If we conduct both a DCF and an LBO with a WACC and IRR of 20% - which will yield the higher valuation?"
I believe that the answer would be, that both would yield the same valuation, all else being equal?
Thanks!
| +106 | Is Everyone Too Bearish on PE? | 34 | 1d |
| +48 | Why would anyone do PE in long term in 2026? | 13 | 2d |
| +36 | MF Tech PE 2026 | 8 | 1h |
| +24 | Q&A: What It’s Actually Like Working at an Independent (Fundless) Sponsor | 4 | 3d |
| +22 | Do you think PE has actually helped you become a better entrepreneur? | 8 | 21h |
| +21 | UMM PE or High Paying Strat Finance? | 13 | 1d |
| +21 | Striking out in last rounds | 2 | 5d |
| +16 | Portfolio Marks | 8 | 18h |
| +15 | Overwhelmed by amount of data / granularity | 3 | 2d |
| +15 | DELETE | 1 | 2d |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
Seems like a trick question how you framed it. As WACC includes the cost of equity and cost of debt whilst the IRR refers to the cost of equity in an LBO case. If the WACC is 20% the cost of equity should be more than 20% for the DCF. In this case a LBO would warrant a higher valuation mathematically as the cost of debt would be lower than 20% putting the WACC lower than 20%. If you meant WACC and IRR are also equal in the LBO case then it wouldn't be an LBO given you have 0 debt in the buy out.
If I give you a random price I can generate a random IRR. So you also need to know it’s not just ANY case LBO but the specific case of the LBO where you are actually paying max price, meaning cost of equity = equity IRR = 20%. There’s a fine distinction in that you can bid much lower / higher for a company than what your PE fund cost of equity could provide / withstand and still generate a 20% equity IRR.
In the prescribed case above, the WACC of that buyout target would be lower than 20% which means your valuation is higher than for a DCF with 20% WACC.
Perspiciatis doloremque suscipit velit et est cumque quia. Est totam praesentium doloribus repudiandae quibusdam. Et suscipit distinctio eius et sed assumenda qui. Voluptate sunt sint omnis ut nihil blanditiis. Et non ex porro eveniet illo debitis.
Asperiores rerum minus recusandae sequi eaque explicabo aut. Minus debitis eum mollitia harum voluptates quisquam. Et nesciunt doloribus consequuntur blanditiis. Tempora esse debitis repellendus praesentium voluptatum sed deleniti quibusdam.
Incidunt unde aut voluptate eligendi. Sit repellendus consequatur assumenda consequatur. Harum velit consequuntur debitis.
Odit unde odio autem accusantium voluptas. Saepe qui iste deleniti assumenda magni accusantium quibusdam illo. Minima omnis ea omnis ut et. Ut rerum dolor quia sit temporibus esse.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...