Had an interview the other day and the question of which valuation method produces the highest value came up. My answer was precedent transactions>comparables due to premiums etc. Then I was specifically asked about DCF and I said that it depends on your inputs and estimations but usually it gives a higher price than the other two. The interviewer didn’t seem to like my answer and kept asking for the exact reason which I was unable to provide. After the interview I had a look online with no luck so I am here asking for your guidance! What do you think?
No they told me I was wrong about the DCF. So I am just wondering what was the problem. I mean, what is the exact reason that DCF yields a higher value? Does anyone know?
Your answer is pretty correct - I would however add that after modeling for the next 2-3 years, the growth rate that is chosen for future revenue growth is usually based on an optimistic prediction made by the analyst for the DCF - and the effect of this growth rate is huge thus possibly leading to major overvaluation.
I think its a ridiculous question and if one approach yields the highest answer there is something wrong with the data and assumptions underpinning your model. All models would not even be applicable to a given valuation circumstance.
generally DCF gives the highest value because of the future growth prospects which are not priced in the comparable and other methods and assumptions (mostly optimistic)
Try and remember that for an interview next time. p.s u are absolutely right… however the main trigger word he (interviewer) was looking for was growth prospects.