What are the three main valuation methodologies used in investment banking?
Answer
(1) Comparable Company Analysis (Comps) — values a target using trading multiples of similar public companies. (2) Precedent Transaction Analysis — values based on acquisition multiples paid in comparable M&A deals. (3) Discounted Cash Flow (DCF) — values the target as the present value of its projected future cash flows.
Why interviewers ask this
These three methods are sometimes called the 'valuation trinity.' Comps capture the current market view; precedent transactions reflect the acquisition premium built into completed deals; DCF gives the intrinsic-value perspective. In a pitch book, all three are stacked together in a 'football field' chart. Precedent transactions typically produce the highest values (control premium), comps fall in the middle, and DCF can swing widely depending on assumptions.