Case Interview - Question types Case Interview Business Valuation

  A quick glance

  1. Case Interview Business Valuation – The big picture
  2. Cracking the Case Interview Business Valuation
  3. Self-practice

1. Case Interview Business Valuation - The big picture

What is it?

Case Interview Business Valuation is a special type of Guesstimate question where the target variable is the value of a company or a business line. An example of a real McKinsey Business Valuation question is how much is Singapore Airlines worth today?

Generally, you will still follow the same 4-step approach of Guesstimate questions:

(1) Clarify, (2) Breakdown, (3) Solve, and (4) Consolidate.

However, with Case Interview Business Valuation questions, step (2) and step (4) require a little more technical knowledge. One of the best ways to grasp this concept is to break it down into 3 MECE approaches:

The income approach

(net present value)

We look at businesses under the lens of expectations – that is to rely on the expected (future) income and then discounting it to get the current (net present) value.

Expected income here comprises of two parts:

  • The expected economic benefits.
  • The level of risk associated with the investment.

The asset-based approach (net asset value)

It is the ”you-are-what-you-own” method: the value of a business is equal to the sum of its parts.

  • Tangible assets are taken into account at their acquisition value, net any depreciation and adjusted to fair market value wherever possible.
  • Intangible assets are determined through the company’s overall enterprise value.

The market approach

(market value)

A market approach is a method of determining the appraisal value of an asset, based on the selling price of similar items.

  • The market price of the actively traded stocks in a free and open market can be a valid indicator of value.
  • We can also evaluate the company worth based on the prices of similar companies recently sold.

We will be showing you two of the most popular Business Valuation methods. Usually, you shouldn’t need more complicated financial techniques in a case interview.

2. Cracking the questions

A. Finance 101 – Discounted Cash Flow method

The rationale behind this method is this: how much money do you need to have in the bank now to generate a specified amount of annual Cash Inflow (Income).

  • General method: Find the future cash flow and then discount it to the present.
  • Detailed Calculation: Value of a Business = Expected Annual Cash Flow/Annual Interest Rate.

How much is Singapore Airlines worth today?

To find out the value of Singapore Airlines, we need to know its (1) annual cash-flow (or net profit) and (2) the market interest rate.

(1) Let’s estimate the annual net profit of Singapore Airlines…… So according to this estimation, Singapore Airlines net profit is $200 million.

(2) Assume that the market interest rate is 10%, it that a fair assumption?

With the annual net profit of $200 million and the market interest rate of 10%, Singapore Airlines is worth approximately $200 million / 10% = $2 billion

B. Finance 102 – Industry Multiple method

Think about this Case Interview Business Valuation question: “Why are the values of NBA teams so high even though most of them neither make money nor are expected to make money?”. The answer is that people own teams for reasons other than just money. The Discounted Cash Flow only takes money into consideration.

To mitigate this, we use the standardized values of an industry (Revenue, Net Profit, Number of Registered Users, etc.). The Industry Multiple is the relative ratio of how many times of the Base Value the company’s value is.

  • General method: Find the Base Value that best predicts a company’s value and the value of Industry Multiples in each particular industry.
  • Detailed Calculation: Value of a Business = Base Value x Industry Multiples.

How much is Singapore Airlines worth today?

Suppose in the airline industry, Revenue is the best Base Value. We have some data on Singapore Airlines’ three peer companies as follows:

 

Average Annual Revenue (mil $)

Realized Value based on real acquisition deals (mil $)
Singapore Airline$200?
Northwest Airline$150$100
Trans Airways$50$30
Cambodia Airlines$10$7.5

The best estimate of the airline Industry Multiple is ( 100 + 30 + 7.5 ) / ( 150 + 50 + 10 ) = 0.65. Therefore the best estimate of Singapore Airlines Value is $200 x 0.65 = $130 (mil).

3. Business Valuation Practice

As with any other case interview concepts, constant practice is the key to success. Self-practice by estimating the Value of the following. You can find the data for calculation from free online sources!

  • Southwest Airlines
  • Walmart
  • Harvard University
  • Manchester City Soccer Team
  • Apple
  • This website: https://mconsultingprep.com/
  • Tax Division of Deloitte in the New York City office
  • Marriott
  • University of Alabama Football team
  • Statue of Liberty

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