Valuation Interview Drill For M&A
This conversation was generated using Cook'd AI's career assistant and reviewed by Fallon Han from our editorial team for accuracy.
I am a senior finance student in Canada and I'm prepping for an elite boutique M&A analyst interview. I have no banking internship, so I need the valuation part to be tight. Can you press me on comparables, DCF assumptions, and why multiples move instead of just asking for definitions?
Absolutely. Let us do it like a real interview. Start with trading comparables: walk me through how you would build a comp set for a Canadian industrials target, and then explain which multiple you would lead with and why. I want the reasoning, not just the formula.
I would start with public companies that are similar in business model, size, growth, margins, geography, and customer mix. Then I would look at EV over EBITDA as the main multiple because it is capital structure neutral and lets me compare operating performance across firms. I would cross-check with EV over revenue if margins are still unstable. The key is to screen out names with different accounting, one-time items, or very different leverage.
Good start, but I am going to push you. Why can EV over EBITDA still be misleading even though it is capital structure neutral? And if your target has higher growth than the peer set, what should happen to its multiple in theory, and what could still make the market assign it a lower one?
EV over EBITDA can still be misleading because EBITDA ignores capex, working capital needs, and differences in accounting policy. Two companies can have the same EBITDA but very different free cash flow. If the target has higher growth, its multiple should usually be higher because investors are paying for future earnings power. But the market might still assign a lower multiple if the growth is lower quality, more cyclical, riskier, or if the company has weaker margins, customer concentration, or execution risk.
Better. Now move to DCF. Suppose the banker asks you to build a DCF for a mid-market Canadian business services company. What are the three or four assumptions you would pressure-test first, and how do you avoid making the model look precise when it is really fragile?
I would first pressure-test revenue growth, EBIT margin, tax rate, and capex or working capital assumptions. Those drive free cash flow the most. I would avoid false precision by using a range rather than a single point estimate for key inputs, keeping the terminal growth conservative, and checking whether the implied exit multiple from the DCF is reasonable versus public comps. I would also make sure the forecast reflects the business cycle and not just a smooth straight line.
That is the right framework. Now answer this like an analyst: if interest rates rise, what tends to happen to valuation multiples and DCF values, and why? Also, tell me one situation where multiples can expand even in a higher-rate environment.
When interest rates rise, valuation multiples and DCF values usually fall because the discount rate increases, which reduces the present value of future cash flows. Higher rates also make debt more expensive, so the market often pays less for each dollar of earnings or cash flow. One situation where multiples can still expand is if earnings growth accelerates enough to outweigh the higher discount rate, or if the company becomes much less risky and free cash flow improves materially.
Good. Final drill: explain why two companies with the same EBITDA margin can trade at very different multiples. Give me the highest-quality answer you can in 30 seconds, as if I interrupted you mid-interview.