Valuation/Sizing - Determine an appropriate value and method for valuation of the Empire State building?

Understanding how to determine a company's value is a crucial skill in strategy consultingstructured approach to valuation is essential. While full-scale valuation analyses are rare in case interviews, you may still be asked questions like, "How much would you pay for company XY?" or "Is this offered price reasonable?" Let's take a closer look on how to approach valuation in a case interview: The Most Common Methods of Valuing Are the Discounted Cash Flow (DCF) and the Industry Multiple MethodSince case interviews are designed to test structured thinking rather than financial modeling skills, you won’t be expected to conduct a full valuation. Instead, you’ll likely need to estimate the worth of a company, product, patent, or service, often with limited data. Your task is to provide a logical and well-reasoned valuation rather than an exact figure.Discounted Cash Flow MethodThe first valuation method is the Discounted Cash Flow Method. This method shows how much money you would have in your savings account at a certain interest rate in order to provide you with the same annual cash flow generated by the company that is being evaluated.To calculate this, you divide projected annual cash flows by an appropriate discount rate (or interest rate). Naturally, the discount rate for a business investment is higher than that of a savings account because investing in a company carries more risk.👉 For more details on how to use the Discounted Cash Flow (DCF) method, have a look at our Net Present Value (NPV) lessonIndustry Multiple MethodThe Industry Multiple Method provides a relative valuation by comparing a company to similar businesses in the industry. This is especially useful when additional factors—such as brand value or strategic positioning—affect valuation beyond simple cash flow calculations.For example, football teams are often overvalued compared to their financial returns because their brand, fan base, and sponsorship potential add intangible value. The industry multiple method accounts for such variations.The process involves:Identifying a relevant financial metric (e.g., revenue, EBITDA, or book value).Finding the average multiple for similar companies (e.g., P/E ratio, EBITDA multiple).Multiplying the chosen metric by the industry multiple to estimate value.Example: Price-to-Book Ratio (P/B)If a company’s assets are valued at $200 million but it was sold for $100 million, the price-to-book ratio is 0.5 (100M ÷ 200M). By averaging this ratio across comparable companies, you can estimate a reasonable valuation for a target firm.Other commonly used valuation multiples include:Price-to-Earnings Ratio (P/E)EV/EBITDA MultipleSince precise calculations aren’t required in case interviews, you don’t need to memorize industry-specific multiples. However, a rough understanding can help:A typical industry multiple can be EBITDA × 10.Discount rates vary from 3% (inflation level) to 20% (high-risk investments). Key TakeawaysUse the Discounted Cash Flow (DCF) method to value a firm based solely on its expected profits.Use the industry multiple method to double-check if the DCF valuation is reasonable. Sometimes other aspects need to be factored in like brand value, customer loyalty, liabilities, etc.There are several types of industry multiples to choose from. For more precise valuation, choose more types of industry multiples.Practice M&A cases to optimize your valuation-techniques:

Questions about market size are frequently asked in case interviews in consulting because they require a blend of logic, mathematics, and common sense. They can be asked as standalone questions or as part of a larger case. Applicants who are familiar with market sizing questions can really perform here. What Are Market Sizing Cases?If you're applying to top consulting firms like McKinsey, BCG, or Bain, you're unlikely to escape a market estimation case. Market sizing cases are considered "back-of-the-envelope" calculations because they can be done on the back of an envelope. Despite the name, it's not just about estimating market sizes; other estimations may also be asked for.For example, if you're discussing a British clothing retailer's growth strategy, you could calculate on an envelope how large the online clothing market is and what percentage of the market the retailer already penetrates. If you perform these calculations quickly, the conversation with the client stays fluid, leaving a good impression.You can receive the question about market size as a standalone case (although this is less common) or as part of a more comprehensive problem, such as market entry. The good news: There's no right or wrong answer when it comes to the question of market size. The interviewer is less concerned about the specific number you come up with for the market than the approach you took to arrive at that number. Why Are Market Sizing Cases Commonly Used in Consulting Interviews?Market Sizing Cases are used to test your quantitative and logical abilities. The interviewer wants to ascertain whether you work well with numbers and if you can make informed assumptions and deal with ambiguities. Questions about market size aren't just about the size of markets; they also involve other types of estimations, such as the number of golf balls in a jumbo jet. As you may have noticed, math is crucial in tackling these questions since you don't have a calculator to rely on. Most importantly, you need to be comfortable dealing with large numbers like millions and billions as well as percentages. More on that later. How Do You Best Approach Market Sizing Cases?Now that we understand the theory behind Market Sizing Cases and their relevance to your case interview, let's take a closer look at the process.Segmentation – The Key to Market Sizing CasesIf you've done some reading on case interviews before delving into market sizing questions, you might have come across areas where segmentation is necessary. Segmenting data is a crucial skill you must master as both a candidate in a case interview and in your later career as a consultant. Segmentation generally refers to dividing a larger whole into smaller parts or segments. The principle you need to understand to do this correctly is the MECE principle.MECE stands for "mutually exclusive, collectively exhaustive." Simply put, segmenting a group of data according to the MECE principle means forming subgroups that do not overlap but collectively cover the entirety of the data, meaning no data is missing. An example useful for market sizing questions is dividing a country's population into age groups (as different age groups often behave differently).Below is a breakdown into Group 1 in the age range 0 to 14, Group 2 in the age range 15 to 64, and Group 3 for everyone over 65: Note that none of the groups overlap, so no age is counted twice, but also no age is overlooked. Now that the population is correctly segmented, we can treat each group differently. If we had divided the population of the United Kingdom into the aforementioned groups, we could estimate clothing expenditures per person in these groups in online retail. Common sense suggests that expenditures per person in the 0-14 age group are lower than in the 15-64 age group. We can justify this estimation by noting that the majority of 0-14-year-olds do not purchase their clothing online.