How to Answer “How do you value a company for an IPO?” in Investment Banking Interviews
“How do you value a company for an IPO?” is a core prompt in investment banking interview prep because it tests whether you can turn valuation theory into a market-facing equity story.
A strong answer explains company valuation for IPO as a range built from multiple methods (trading comps, DCF, and precedent/IPO comps), then bridges to how bankers translate that range into an indicated IPO price, market cap, and number of shares to sell.
What Interviewers Look For in Company Valuation for IPO Answers
Interviewers are checking whether you understand that IPO pricing is not “one magic number” but a range informed by public market comparables, fundamentals, and investor demand. They want to hear the logic behind selecting appropriate peers, choosing metrics (EV/Revenue vs EV/EBITDA vs P/E), and making adjustments for growth, margins, and risk.
They are also testing whether you can connect enterprise value to equity value in an IPO context: subtract net debt, consider any preferreds/convertibles, and translate equity value into a price per share given the post-money share count (including option pools and new shares issued).
Finally, they are evaluating judgement and communication. Analyst-level answers should be structured, quantify key drivers (growth, profitability, WACC, terminal assumptions), and include “sanity checks” like implied multiples at the proposed price and how the valuation shifts under different market conditions.
IPO Valuation Techniques: A Step-by-Step Framework
- 1
Step 1: Clarify the IPO setup (what are we valuing?)
Start by defining the object you’re valuing and the output you need. In an IPO you typically build an equity value range (implied market cap) and then translate it into an IPO price range per share.
Ask (or state) the key setup items: (1) is the company primary issuance (new shares), secondary sale, or both; (2) current and fully diluted share count, including options/RSUs and convertibles; (3) latest financials (LTM and forward estimates); and (4) capital structure items that bridge enterprise value to equity value (net debt, preferred stock, minority interest).
Close the step by framing the deliverable: “I’d triangulate valuation using multiple valuation methods for IPO and present a defensible range, then show what that implies for price per share and key trading multiples.”
- 2
Step 2: Build public trading comps (anchor to the market)
Lead with trading comps because most IPO investors price relative to listed peers. Select a peer set that matches business model, revenue mix, growth profile, margins, and geography. Decide the right metrics: high-growth or loss-making businesses may be anchored on EV/Revenue or gross profit multiples, while profitable companies lean on EV/EBITDA and P/E.
Use LTM and forward (NTM/next FY) multiples, because IPO buyers focus on forward fundamentals. Then adjust for differences in growth and profitability—e.g., a company growing faster with improving margins can justify a premium.
The output is an implied enterprise value range (and equity value after the bridge) that you can directly convert into an IPO market cap and price per share. This is one of the most standard IPO valuation techniques you’ll be expected to articulate cleanly.
- 3
Step 3: Cross-check with DCF (fundamentals + sensitivities)
Add a DCF as a fundamentals-based cross-check and to show you can defend the valuation if comps are noisy. Outline the core build: forecast revenue drivers, operating margins, reinvestment needs, and convert to unlevered free cash flow.
Discount those cash flows using WACC (cost of equity from CAPM, cost of debt net of tax, target capital structure), and calculate terminal value via perpetuity growth and/or an exit multiple sanity check. Emphasise sensitivities: valuation typically moves meaningfully with WACC and terminal assumptions.
In interviews, keep it high level but specific: state the two or three biggest drivers (growth, margin trajectory, reinvestment intensity, WACC) and show you’d reconcile the DCF range with the market-implied comps range rather than forcing a precise point estimate.
- 4
Step 4: Add IPO/precedent comps and convert to an IPO price range
Where relevant, add IPO comps (recent listings in the same sector) or precedent transactions as another reference point—being clear that deal comps can embed control premiums and different market regimes. For IPO comps, focus on how companies priced (discount/premium to peers), aftermarket performance, and the multiple at the offer price.
Then translate your valuation range into price per share:
- Start with implied equity value (market cap).
- Divide by fully diluted shares outstanding post-IPO (including new shares issued and any option pool/convertible impacts).
- Explain that the final marketed range often incorporates a discount to current trading comps to compensate IPO investors for liquidity/risk and to support healthy aftermarket trading.
This step shows you understand the bridge between valuation theory and execution in investment banking technical questions around IPOs.
- 5
Step 5: Sanity-check and articulate the equity story (why this range is credible)
Finish with checks that a banker would actually present: implied multiples at the low/mid/high price, comparison to peers, and whether the range is consistent with growth and profitability. If your range implies a multiple far outside the peer distribution, explain the specific reason (e.g., superior retention, unit economics, or margin expansion) or tighten assumptions.
Also mention market reality: IPO pricing depends on demand in the bookbuild, sector sentiment, and current volatility. A solid answer acknowledges that you’d update the comps set and pricing assumptions as markets move.
End by summarising: “I’d triangulate comps, DCF, and IPO comps into a range, convert to equity value and price per share, and defend it using key drivers and sensitivities.”
Model Answer for This Investment Banking Technical Question (Analyst)
To value a company for an IPO, I’d build an equity value range by triangulating market-based comps with a fundamentals cross-check, and then convert that range into a price per share.
First, I’d clarify the setup—primary vs secondary shares, the fully diluted post-IPO share count, and the capital structure items needed to bridge enterprise value to equity value like net debt and any preferreds.
Next, I’d anchor on public trading comps. I’d pick a peer set with similar business model and growth/margin profile, apply the most relevant multiples—often forward EV/Revenue for high-growth names or EV/EBITDA and P/E for profitable ones—and then adjust within the peer range based on relative growth and profitability. That gives an implied enterprise value range, which I’d convert to implied equity value.
Then I’d run a DCF as a cross-check: forecast unlevered free cash flow, discount at WACC, and sensitise the valuation to WACC and terminal assumptions. I’m mainly using the DCF to validate whether the comps-implied valuation is consistent with fundamentals.
Finally, I’d review recent IPO comps in the sector—how they priced versus peers and their aftermarket performance—and translate the equity value range into an IPO price range by dividing by post-IPO fully diluted shares. I’d sanity-check the implied multiples at the proposed range and be ready to explain the equity story behind any premium or discount.
- Use a “range + triangulation” framing; IPO pricing is rarely a single-point valuation.
- Always bridge EV to equity value and explicitly mention fully diluted post-IPO shares.
- Name the key sensitivities (WACC, terminal assumptions, forward multiples) instead of over-explaining mechanics.
- Keep the execution link: valuation range → market cap → price per share → implied multiples.
Common Pitfalls in Valuation Methods for IPO Pricing
- Treating IPO valuation as only a DCF and ignoring that public comps usually anchor investor pricing.
- Skipping the EV-to-equity bridge (net debt, preferreds, minorities) and jumping straight to a share price.
- Using the wrong metric for the business (e.g., EV/EBITDA for a company with negative EBITDA) without explaining an alternative.
- Not adjusting for growth/margin differences across peers, leading to an un-defendable “average multiple” answer.
- Forgetting fully diluted share count dynamics (options, RSUs, convertibles, new issuance), which directly affects IPO price per share.
- Ignoring market conditions and bookbuild reality—IPO ranges move with volatility and sector sentiment.
Follow-Ups: Common IPO Valuation Questions in Investment Banking
Which valuation method matters most for IPO pricing?
Typically trading comps matter most because IPO investors buy relative to listed peers, with the DCF used as a fundamentals cross-check and for sensitivities.
How do you go from enterprise value to IPO price per share?
Convert EV to equity value by subtracting net debt and other claims, then divide by the fully diluted post-IPO share count (including new shares issued and option/convertible impacts).
How do you pick the right multiples for IPO comps?
Match the metric to where the business is in its lifecycle—EV/Revenue or gross profit for high-growth/loss-making firms, EV/EBITDA and P/E when profitability is established—using forward periods where possible.
What inputs drive the DCF the most in an IPO context?
WACC and terminal assumptions, plus the margin trajectory and reinvestment intensity that determine free cash flow conversion.
Why do IPOs sometimes price at a discount to comps?
To compensate new investors for uncertainty and liquidity risk and to support orderly aftermarket trading; the discount can widen in volatile markets.
How to Prepare for IPO Valuation Questions with Timed Practice
- Build a 90-second version that hits: comps → DCF cross-check → equity value bridge → price per share; then add detail only when prompted.
- Practise a quick “peer set rationale” aloud: why each comp is comparable and which metric you’d prioritise.
- Do one sensitivity drill: explain how a 100 bps change in WACC or a turn of the multiple changes equity value directionally.
- In AceTheRound, rehearse this as a 3–4 minute response and iterate until you can deliver it without backtracking.
Ready to practice with AceTheRound?
Create an account to unlock AI mock interviews, feedback, and the full prep library.