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Finance Interview Formulas Cheat Sheet
Technical questions in finance interviews test whether you can think through problems on the spot. You won’t have a calculator or spreadsheet — just a whiteboard and your brain. This cheat sheet covers every formula that comes up regularly in IB, PE, and equity research interviews so you can walk in confident.
Enterprise Value Bridge
| Concept | Formula | Interview Context |
|---|
| Equity Value (Market Cap) | Share Price × Diluted Shares Outstanding | “Walk me through the EV bridge” — the most common technical question |
| Diluted Shares | Basic Shares + In-the-Money Options (Treasury Stock Method) | Use TSM: proceeds from exercise buy back shares at current price |
| EV to Equity Bridge | Equity Value = EV − Debt − Preferred − Minority + Cash | Reverse direction: going from EV back to what equity holders own |
Valuation Multiples
| Multiple | Formula | Key Notes |
|---|
| P/E Ratio | Share Price ÷ EPS | Equity value metric; use forward P/E for comparisons |
| EV/EBITDA | EV ÷ EBITDA | Most common interview multiple; capital-structure neutral |
| EV/Revenue | EV ÷ Revenue | Used for high-growth or unprofitable companies |
| PEG Ratio | P/E ÷ Earnings Growth Rate (%) | Adjusts P/E for growth; PEG < 1 suggests undervaluation |
| P/B Ratio | Share Price ÷ Book Value per Share | Important for banks and financial institutions |
| EV/EBIT | EV ÷ EBIT | More comparable than EV/EBITDA when D&A differs significantly |
DCF Core Formulas
| Formula | Equation | Interview Tip |
|---|
| Unlevered Free Cash Flow | EBIT × (1 − Tax Rate) + D&A − CapEx − ΔWorking Capital | Start with EBIT, not net income — UFCF is pre-debt |
| Levered FCF | Net Income + D&A − CapEx − ΔWC − Debt Repayment + New Borrowing | Cash available to equity holders after debt service |
| Terminal Value (Gordon Growth) | FCF × (1 + g) / (WACC − g) | g should be ≤ long-term GDP growth (2–3%); TV is often 60–80% of total EV |
| Terminal Value (Exit Multiple) | EBITDA_n × Exit Multiple | Cross-check against perpetuity growth to ensure consistency |
| Present Value | CF / (1 + r)ⁿ | Discount each year’s FCF and terminal value back to today |
WACC and Cost of Capital
| Component | Formula | Typical Range |
|---|
| Cost of Equity (CAPM) | Rf + β × (Rm − Rf) | 8%–14% for most public companies |
| Cost of Debt | Interest Expense ÷ Total Debt (or yield on existing debt) | 3%–7% for investment grade; higher for HY |
| After-Tax Cost of Debt | Kd × (1 − Tax Rate) | Interest is tax-deductible — always use after-tax |
| Equity Risk Premium | Rm − Rf (historical or implied) | ~5%–6% is the commonly used range |
| Risk-Free Rate | 10-Year Treasury yield | Currently ~4%–4.5% |
LBO Key Formulas
| Formula | Equation | What It Measures |
|---|
| Equity Value at Entry | Purchase EV − Net Debt Assumed | How much equity the PE fund puts in |
| Equity Value at Exit | Exit EBITDA × Exit Multiple − Net Debt at Exit | What the equity is worth when sold |
| Money Multiple (MOIC) | Equity at Exit ÷ Equity Invested | PE target: 2.0x–3.0x+ over 5 years |
| IRR (Rule of 72 shortcut) | If 2x in 3 years ≈ 26%; 2x in 5 years ≈ 15%; 3x in 5 years ≈ 25% | PE target: 20%+ IRR |
| Debt / EBITDA (Entry Leverage) | Total Debt ÷ EBITDA | Typical LBO: 4x–6x leverage at entry |
| Sources = Uses | Debt + Equity = Purchase Price + Fees + Refinancing | Fundamental LBO identity — must always balance |
Profitability and Returns
| Metric | Formula | What It Tells You |
|---|
| ROE | Net Income ÷ Shareholders’ Equity | Return generated on equity investment; target: 15%+ |
| ROA | Net Income ÷ Total Assets | How efficiently assets generate profit |
| ROIC | NOPAT ÷ Invested Capital | Best measure of capital allocation — compare to WACC |
| DuPont Analysis | ROE = Net Margin × Asset Turnover × Equity Multiplier | Decomposes ROE into profitability, efficiency, and leverage |
| NOPAT | EBIT × (1 − Tax Rate) | Net operating profit after tax — used in ROIC and EVA |
Analyst Tip
In interviews, you’ll rarely need to calculate exact numbers. What matters is knowing the formula, understanding the logic behind it, and explaining what each component means. When asked “walk me through a DCF,” start with unlevered free cash flow, project 5 years, calculate terminal value, discount everything at WACC, then bridge from EV to equity value. Practice this until it’s automatic.
Key Takeaways
- The EV bridge (Equity + Debt − Cash = EV) is the most frequently tested concept in IB interviews
- EV/EBITDA is the go-to multiple because it’s capital-structure neutral
- UFCF starts with EBIT, not net income — it’s a pre-debt cash flow measure
- WACC = weighted cost of equity + after-tax cost of debt
- LBO returns come from three levers: debt paydown, EBITDA growth, and multiple expansion
Frequently Asked Questions
Why do we add debt and subtract cash when calculating enterprise value?
Enterprise value represents the total cost of acquiring a company. When you buy a company, you take on its debt obligations (you must repay them), so debt is added. But you also get its cash, which offsets the purchase price, so cash is subtracted. Think of it as: what would you write a check for to buy the entire business free and clear?
When should you use EV/EBITDA vs. P/E?
Use EV/EBITDA when comparing companies with different capital structures or tax situations — it’s capital-structure neutral. Use P/E when capital structure is similar and you want a quick equity-level comparison. Banks and financial firms are better valued on P/E or P/Book because their debt is an operating asset, not financing.
What are the three sources of return in an LBO?
LBO returns come from: (1) Debt paydown — using the company’s cash flow to pay down debt, increasing equity value; (2) EBITDA growth — growing the business through revenue growth and margin improvement; (3) Multiple expansion — selling at a higher EV/EBITDA multiple than the purchase price. A good LBO doesn’t rely on multiple expansion alone.
How do you calculate diluted shares?
Use the Treasury Stock Method (TSM): take the number of in-the-money options and warrants, calculate the proceeds if they were exercised (number × strike price), then assume the company uses those proceeds to buy back shares at the current market price. Net new shares = options exercised − shares bought back. Add these to basic shares outstanding.
Why does terminal value often represent 60–80% of enterprise value in a DCF?
Terminal value captures all cash flows beyond the explicit projection period (usually 5–10 years). Since most of a company’s value lies in its long-term cash generation, not just the next few years, the terminal value dominates. This is also why the terminal growth rate and exit multiple assumptions are the most sensitive inputs in any DCF — small changes create large swings in value.