Would a DCF or LBO give a higher valuation?
Answer
Once again, assumptions are everything and there’s no 100%, always right answer. But, usually an LBO gives a lower valuation. An easy way to look at it is that in an LBO most places use a large (if not all) portion of each year’s available cash flow to pay down debt, so you only get the terminal value. With a DCF, you’re taking into account cash flows from every year and adding the terminal value.
It’s a lot more nuanced but it took me a good year on the job to fully understand it and the above is an excellent answer for an interview.
Why this matters to bankers
Similarly to the above, it’s important to understand where both methods sit in the valuation spectrum to ensure what valuation you’re ascribing makes sense.