Financial Valuation

Looking for Interview questions in Financial Valuation, here are the list of top interview questions to prepare for your next Finance interview.

Q.1 What is Free Cash Flow to Firm (FCFF)?
Free cash flow to the firm (FCFF) is primarily used in DCF financial modelling. Such that a company generates cash flows from its operations by selling goods or services. Such that some amount of its cash goes back into the business to renew fixed assets and for working capital requirement. In layman term Free cash flow to firm is the excess cash generated over and above these expenses. Free cash flow to firm goes to the debt holders and the equity holders. Free Cash Flow to Firm or FCFF Calculation = EBIT x (1-tax rate) + Non Cash Charges + Changes in Working capital – Capital Expenditure
Q.2 Name the most common multiples used in valuation.
Some of the few common valuation multiples which are frequently used in valuation are – 1. EV to EBIT 2. Price to Cash Flow 3. Enterprise Value to Sales 4. EV to EBITDA 5. PEG Ratio 6. Price to Book Value 7. PE Ratio
Q.3 Name the three most used methodologies of valuation and how would you rank them?
This is one of the most common question asked. In which case following methods are used - 1. Discounted cash flow analysis (DCF) Valuation, 2. Comparable comp analysis 3. Precedent transactions Now to answer the question about ranking is little tricky. In general precedent transactions are higher than the comparable companies as control premium is built into it. In the case of DCF, it can be both ways (highest or lowest) based on the assumptions we make during the computation.
Q.4 What do you understand by precedent transactional analysis?
The precedent transactional analysis is a valuation method which takes the past transactions of similar companies to value a company. We use the following steps, to conduct precedent transactional analysis – 1. Similar companies are chosen based on their features or work industry. 2. We compare the size of the transactions as it should be similar. 3. We compare the type of transaction and the features of buyers as it should be same. 4. Then the transactions that happened more recently have been considered more valuable. 53. We estimate on the basis of above factors.
Q.5 When should we use the sum of the parts?
In general, sum of the parts is useful for companies that have several divisions unrelated to each other. For instance if a company has consumer finance division, technology division and media division and an energy division. Then sum of the parts would be very useful in this case.
Q.6 What is the outcome, if the strike price increases and assuming everything else remaining the same?
Value of the put option increases and that of the call option decreases.
Q.7 What is strategic value driver?
Strategic value driver is an operational initiative that can be undertaken with the purpose of creating value.
Q.8 What is the proper discount rate to use when evaluating a potential acquisition by DCF method?
A rate that reflects the risk of the potential acquisition.
Q.9 How is EVA computed?
It is the firm's net operating profit after tax (NOPAT) less a dollar cost of capital charge.
Q.10 What can be inferred if the liquidation value of a company is negative?
It indicates that the firm's debt exceeds the market value of assets.
Q.11 What should be subtracted from EBITDA to compute net cash flow to invested capital?
Capital expenditures and additions to working capital, but neither depreciation nor interest.
Q.12 if the expected rate of growth is constant in perpetuity, what will be the relationship between the discounting and capitalizing models?
The discounting model would be expected to produce the same value as the capitalizing model.
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