# Valuation analyst Interview Questions

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Valuation Analyst interview questions shared by candidates### What is WACC? What happens to DCF model if u increase depreciation expense? Why?

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Depreciation is a non-cash expense. However, increasing depreciation reduces the tax the company pays. If you only increase depreciation, free cash flow is higher due to tax savings. However, if projected depreciation increases you should examine why. Depending on the explanation, it may be necessary to adjust projected capital expenditures which would act to reduce cash flow. Less

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DCF Is discounting the future free cash flow to present value and the free cash flow means operating income minus operating expenditure. Depreciation is one type of operating expenses so any increases in operating expenses reduces cash flows. So it reduces the DCF. Although, in case of Real Estate, instead of earning we use fund from operation (FFO) which excludes the depreciation cost, because real estate rarely decrease in value over time and it usually appreciates. So it doesn’t have any effect on the DCF for Real Estate. Less

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DCF will increase because free cash flow calculation requires the new addition of this depreciation expense. Less

### Explain my recent experience. This was a difficult because I was laid off 2 years prior at the time and had not been working in my profession due to lack of work in my area (IL). I had kept up on required continuing education however. So I had to relate my qualifications and introduce myself as technically qualified and tell her why she should hire me!

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Had to also explain why I was willing to move to Dallas from Rockford, IL for the position. Less

### How would you go about performing a valuation on (my former small non-public company)?

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It depends on the status of the company, the size, and the industry. If its a real estate business, you may use the comparable sales method in which you would examine its holdings, and look at similar recently sold properties' in the area to determine what the fair market value of those properties were. If its a company that was in bankruptcy, you may use the market value of assets method where you find the value of all tangible and intangible assets. If its a thriving small company, you may use the sellers discretionary income multiple method, by determining net income, adding back the owners salary, depreciation and amortization, and other discretionary expenses to determine the true cash flow of the firm and take into account the lifestyle/management style of the owner which can also help one determine the overall risk associated with the company Less

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It depends on the status of the company, the size, and the industry. If its a real estate business, you may use the comparable sales method in which you would examine its holdings, and look at similar recently sold properties' in the area to determine what the fair market value of those properties were. If its a company that was in bankruptcy, you may use the market value of assets method where you find the value of all tangible and intangible assets. If its a thriving small company, you may use the sellers discretionary income multiple method, by determining net income, adding back the owners salary, depreciation and amortization, and other discretionary expenses to determine the true cash flow of the firm and take into account the lifestyle/management style of the owner which can also help one determine the overall risk associated with the company Less

### Can you tell me the formula for discounted cash flow?

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PV=CF(not FV)/... :)

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PV = FV/(1+interest_rate_in_decimal_form)^number_of_periods_i.e._years

### Take me through a DCF.

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Discounted cash flow: Future cash flows of firm (or project) is discounted at certain rate (calculated by opportunity cost of investment measured by cost of equity, cost of debt, gearing etc). Less

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DCF is intrinsic valuation methodology that value the company on it future cash flow generation capability. STEP 1 - forecasting 5 to 10 year cashflows. You project this by projecting EBIT and adjusting it for tax, capex, dep and amortization and change in NWC. Projection depend on various assumption related to growth, revenue, cost etc. STEP 2- We have projected 5year cash flow but the company will operate more then that. So we have to calculate the cash flow from year 6 to infinity in one number which is called the terminal value. Terminal value can be calculated by multiple approach or Groden growth method. STEP 3 – Now that we have calculated the future cashflow and terminal value, we have to discount them to present value , for that we use are WACC as discount rate. Then add all the PV together to calculate enterprise value. You use a stub period when you're valuing a company before or after the end of its fiscal year and there are 1 or more quarters in between the current date and the end of the fiscal year • For example, it's currently September 30th and the company's fiscal year ends on December 31st In this case it wouldn't be correct to assume that Free Cash Flow only starts on January 1st of the next year, because there are still 3 months between now and the end of the year and the company still generates FCF in those 3 months To account for these 3 months, use 0.25 for the discount period, and then use 1.25 for the discount period for the first full year of the model, 2.25 for the next year and so on. Mid year discounting: • You use it to represent the fact that a company's cash flow does not arrive 100% at the end of each year - instead it comes in evenly throughout each year • With the mid-year convention, we would instead use discount period numbers of 0.5 for the first year, 1.5 for the second year, 2.5 for the third year, and so on • The end result is that the mid-year convention produces higher values since the discount periods are all lower Less

### formula for wacc, Gordon growth model, three ways to value a business, etc.

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WACC is calculated by multiplying the cost of each capital source (debt and equity) by its relevant weight, and then adding the products together to determine the WACC value. The Gordon Growth Model (Dividend Discount Model) , is a method for calculating the intrinsic value of a stock (Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors) exclusive of current market conditions. The model equates this value to the present value of a stock's future dividends. Three Ways to value a business - Market (compare to prices of similar assets) Income (the income it generates, DCF, Capitalisation of earnings) Asset (fmv of intangible and tangible assets as well as liability) Less

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1. WACC is the product of the weight of equity and the cost of equity plus the product of the weight of debt, cost of debt, and (1-tax). 2. Gordon's Dividend Growth model is a way to value the firm by equating the value of the firm to the dividend next year divided by the (WACC-growth rate). This formula is useful because it allows you to value a firm with differing growth rates over the time horizon you are valuing. 3. Three Ways to Value a Business- DISCOUNTED FREE CASH FLOW - the most widely used valuation method in which you predict your free cash flows and discount at the WACC FREE CASH FLOW TO EQUITY METHOD - you adjust the FCF computation by deducting the value of the interest expense tax shield and add in your change in debt financing over the period. From there you would discount the FCFE by using the cost of equity. In the answer, you add back the full amount of debt. ADJUSTED PRESENT VALUE METHOD - find the net present value of the company if it was unlevered, or financed solely by equity, and discount that at the unlevered cost of equity. Then you would add in the present value of the tax shield. Less

### What is the WACC?

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It is the weighted cost of equity + the after-tax cost of debt * weight of debt.

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WACC= the weighted average cost of capital (cost of capital=cost of equity and debt) (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. It is a combination of cost of equity and after-tax cost of debt. So about cost of equity, the equity holders' required rate of return is a cost, because if the company does not deliver this expected return, shareholders will simply sell their shares, causing the price to drop. Therefore, the cost of equity is basically what it costs the company to maintain a share price that is satisfactory (at least in theory) to investors. Cost of equity can be calculated by capital asset pricing model= Risk-free rate+ Beta * risk premium (Rm-Rf) –(risk premium is simply the return investors expect above the risk free rate, to compensate them for taking risk by investing in stocks). The net cost of the debt is actually the interest paid less the tax savings resulting from the tax-deductible interest payment. So, the after-tax cost of debt is interest rate company should pay on its debt* (1 - corporate tax rate). WACC is the weighted average of these 2 costs. Less