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  1. 002Company X trades at 12x earnings but 9x EV/EBITDA. Its peers trade at 15x earnings and 7x EV/EBITDA. Give two reasons, with numbers, that make both facts true at once.Valuation and multiples riddlesHardBarclaysNew York · 2026

    Try it first

    Which single fact could, on its own, push X's P/E down and its EV/EBITDA up at the same time?

    Show the worked solution

    X carries more debt and owns a stake in an associate. Debt of Rs 750 crore at 8% costs 5.6% after tax, less than the 6.7% its operations earn on their value, so levering lowers the P/E. The associate adds Rs 22 crore to net income but nothing to EBITDA, while its Rs 300 crore value sits inside EV. Strip it out and X is 7.0x, like its peers.

    Why can two multiples on the same company disagree?

    Picture a house with a mortgage. Its price compared with the rent it earns is one ratio; your equity in it compared with the rent left after the mortgage payment is another. The two only agree if there is no loan. EV/EBITDA looks at the whole business before financing, while P/E looks at the shareholders' slice after interest, tax and anything non-operating. Every gap between them is explained by something that sits between EBITDA and net income, or between EV and equity value.

    What numbers make both facts true?

    Give both companies the same operations: EBITDA Rs 150 crore, depreciation Rs 50 crore, operating profit Rs 100 crore, tax 30%. The peer has no debt, earns Rs 70 crore and is worth Rs 1,050 crore: 15.0x earnings and 7.0x EBITDA. X borrows Rs 750 crore at 8%, so interest of Rs 60 crore leaves Rs 28 crore from operations, and it books Rs 22 crore as its share of an associateA company in which the group holds a significant minority stake, usually 20% to 50%. The group books its share of that company profit below operating profit, never in revenue or EBITDA.'s profit. Net income of Rs 50 crore at 12x is equity of Rs 600 crore, and with the debt that is an EV of Rs 1,350 crore, 9.0x EBITDA.

    Same operations, different capital structure and one non-operating stakePeer: EBITDA 150Who funds the EV, Rs croreequity 1,050What the EV pays forcore operations 1,050Net income70P/E 1,050 / 70 = 15.0xEV/EBITDA 1,050 / 150 = 7.0xCompany X: EBITDA 150Who funds the EV, Rs croreequity 600debt 750What the EV pays forcore operations 1,050associate stake 300Net income2822after 60 of interestP/E 600 / 50 = 12.0xEV/EBITDA 1,350 / 150 = 9.0xCore only: 1,050 / 150 = 7.0x, same as the peer
    Company X's EV of Rs 1,350 crore is funded by Rs 600 crore of equity and Rs 750 crore of debt, and pays for the same Rs 1,050 crore of core operations as the peer plus a Rs 300 crore associate stake. Taking the stake out brings X back to 7.0x EBITDA.

    Which reason moves which multiple?

    Separate them, because the follow-up always asks. Debt lowers the P/E when its after-tax cost is below the earnings yield of the operations. Here debt costs 8% times 0.7, which is 5.6%, while the operations earn 70 on 1,050, or 6.7%. Swapping expensive equity for cheaper debt leaves the operating slice at about 10.7x earnings. The associate does the other job: its Rs 300 crore of value sits inside EV while its profit sits below EBITDA, which lifts EV/EBITDA from 7.0x to 9.0x.

    Name a third candidate if you have time: a lower tax rate than peers raises net income without touching EBITDA, so it also lowers P/E alone. Say what you would check to choose between them: the notes on debt, associates and the effective tax rate.

    Where candidates lose it

    Most candidates say X must have more debt and stop. Debt alone explains the lower P/E, but it does not raise EV/EBITDA if the business is worth the same, because EV is the same whoever funds it. The interviewer is waiting for something that sits inside EV but outside EBITDA.

    The other loss is giving reasons with no numbers. Build one small example in which both multiples land where the question says; it proves the reasons work together.

    What the interviewer asks next

    • Would you subtract the associate stake from X's EV in a comps table, and at what value?
    • If X's debt cost 11% instead of 8%, would its P/E still be below its peers'?
    • Which of the two multiples would you use to value X, and why?

    Asked at Barclays, Investment Banking, New York, 2026 (Wall Street Oasis): A company is trading at a lower P/E but a higher EV/EBITDA than peers

  2. 054A factory makes 10 lakh units a year and sells them at Rs 1,000 each, with cash costs of Rs 700 a unit. It needs Rs 5 crore of maintenance capex a year, pays 25% tax, and would cost Rs 150 crore to build from scratch. At a 12% discount rate and no growth, what is it worth, and which number sets the ceiling?Valuation and multiples riddlesHardDeutsche BankNew York · 2026

    Try it first

    What is the factory's cash flow value at 12%?

    Show the worked solution

    About Rs 156 crore on cash flow, but a buyer will not pay much above Rs 150 crore, the cost of building the same plant. Revenue is Rs 100 crore and cash costs Rs 70 crore. Taking depreciation equal to the Rs 5 crore of capex, tax is 25% of Rs 25 crore, Rs 6.25 crore, leaving Rs 18.75 crore a year: over 12% that is Rs 156.25 crore. Replacement cost caps it.

    How do you get from units to a value?

    Valuing a factory is the same sum as valuing a flat you rent out: the rent left after upkeep and tax, divided by the return you need. A business with no growth is worth its steady yearly free cash flow divided by the discount rate. All the work is in getting the yearly cash right, and the two lines people forget are tax and the capex needed just to stand still.

    LineWorkingRs crore
    Revenue10 lakh units x Rs 1,000100.0
    Cash costs10 lakh units x Rs 700(70.0)
    EBITDA30.0
    Depreciationassumed equal to maintenance capex(5.0)
    Tax25% of 25(6.25)
    Add back depreciation, less capex5 - 50.0
    Free cash flow a year18.75
    Value at 12%, no growth18.75 / 0.12156.25
    The factory turns Rs 100 crore of revenue into Rs 18.75 crore of free cash flow a year after cash costs, maintenance capex and tax, which capitalised at 12% with no growth is worth Rs 156.25 crore.
    The cash flows say Rs 156 crore; the rebuild cost says stop at about 150One year of cash, Rs crore100Revenue-70Cash costs-5Capex-6.25Tax18.75Free cash/ 12%156.25Cash flow value150Rebuild costabove the ceiling: 6.25a buyer builds insteadCeiling = what it costs to build the same plant
    Free cash flow of Rs 18.75 crore a year is worth Rs 156.25 crore at 12%, just above the Rs 150 crore it would cost to build the same plant, so the rebuild cost acts as the ceiling on what a buyer pays.

    Why does the rebuild cost set the ceiling?

    Suppose someone asks Rs 25 lakh for a used car when the same model costs Rs 20 lakh new at the showroom. You walk to the showroom. No sensible buyer pays much more for an asset than it would cost to build an identical one, so replacement cost caps the price even when the cash flows say more. Here the gap is small, Rs 156.25 crore against Rs 150 crore, so a defensible answer sits close to Rs 150 crore.

    The cap is loose in three ways, and naming them is what separates a good answer. Building takes time, perhaps two years with no cash coming in, so a working factory earns a premium for the lost years. Land, permits and trained staff may be hard to copy. And if cash flow value stays well above rebuild cost, rivals build plants, supply rises and prices fall, which pulls the cash flows back down. That last force is why the two numbers tend to converge over time.

    What if the numbers pointed the other way?

    If the cash flow value were Rs 100 crore against a Rs 150 crore rebuild cost, the factory would be worth about Rs 100 crore. Replacement cost is a ceiling, not a floor: nobody pays Rs 150 crore for a plant whose cash flows justify only Rs 100 crore. The floor is what the land and machinery would fetch if sold off, which is a third number worth asking for before you commit.

    Where candidates lose it

    The fast wrong answer capitalises EBITDA, Rs 30 crore over 12%, and says Rs 250 crore. That ignores the tax an owner pays and the capex needed just to keep the machines running, and overstates the value by 60%.

    The second miss is stopping at the cash flow value. The question names a rebuild cost on purpose: the interviewer wants to hear that an asset is worth the lower of what it earns and what it costs to replace, with reasons the cap can bend.

    What the interviewer asks next

    • Building a new plant takes two years. How much more would you pay for the working factory?
    • Unit prices rise 5% a year with costs flat. What happens to the value, and to the case for building a rival plant?
    • What would the land and machinery need to fetch to set a floor above Rs 100 crore?

    Asked at Deutsche Bank, Generalist, New York, 2026 (Wall Street Oasis): how I would value a factory, but that ultimately ended up coming back to the valuation methods

  3. 075A company has an enterprise value of Rs 1,000 crore, with net debt of Rs 300 crore and equity worth Rs 700 crore. It raises Rs 200 crore of PIK notes and holds the cash, then pays the cash out as a dividend. What happens to enterprise value and equity value at each step, and later as the PIK interest accrues?Valuation and multiples riddlesHardMoelis & CompanyLos Angeles · 2026

    Try it first

    Right after the Rs 200 crore of PIK notes is raised and held as cash, what is enterprise value?

    Show the worked solution

    Enterprise value stays at Rs 1,000 crore at every step; only the split between lenders and shareholders moves. Raising Rs 200 crore and holding it leaves net debt at 300 and equity at 700. Paying it out takes net debt to 500 and equity to 500, with shareholders holding the Rs 200 crore in cash. As PIK interest accrues at 10%, the notes grow to 242 after two years and equity falls to 458, value moving to the lenders.

    Why does borrowing not change enterprise value?

    Suppose your house is worth Rs 1 crore and you take a Rs 20 lakh loan against it, keeping the money in the bank. The house is still worth Rs 1 crore; you owe 20 lakh more and hold 20 lakh more, and your net position is unchanged. Enterprise value is the value of the operating business and does not depend on how it is funded; a financing step only changes who has a claim on that value. Here the PIK notes add 200 of debt and 200 of cash, so net debt stays 300, equity stays 700, and EV stays 1,000.

    EV never moves; the notes shift value between lenders and shareholdersNet debt 300Equity 700StartNet debt 300Equity 700Raise 200 PIK, hold cashNet debt 500Equity 500Pay 200 dividend200cashto holdersNet debt 542Equity 458Two years of 10% PIKaccrued 42Enterprise value Rs 1,000 crore at every stepdebt 200 and cash 200 cancelholders: 500 of shares + 200 cash = 700200 x 1.1 x 1.1 = 242 owed
    Enterprise value holds at Rs 1,000 crore through every step: net debt stays 300 when the notes are raised and held, rises to 500 when the Rs 200 crore is paid out, and reaches 542 after two years of 10% accrual, with equity falling from 700 to 500 to 458 as value moves to the lenders.

    What does the dividend do?

    The cash leaves the company and lands in shareholders' pockets. Net debt rises from 300 to 500 because the cash that offset the notes is gone, and equity value falls from 700 to 500. Shareholders are no richer and no poorer: they hold Rs 500 crore of shares plus Rs 200 crore of cash, 700 in all, exactly the 700 they started with. What changed is that the lenders now have a 500 claim ahead of them on the same Rs 1,000 crore of operations, so the equity is riskier and the dividend was financed by that risk.

    What happens as the PIK interest accrues?

    A PIK noteA loan whose interest is paid in kind: added to the principal each period instead of paid in cash, so the amount owed compounds. charges no cash interest; the coupon is added to the principal. At 10%, the Rs 200 crore becomes 220 after a year and 242 after two. With operations unchanged, EV is still 1,000, so equity is 1,000 - 542 = 458: the 42 of accrued interest is value transferred from shareholders to lenders without a rupee moving. In practice EV does move, but for operating reasons: earnings grow or shrink. Two second-order effects can touch EV through financing: interest that is deductible lowers tax and adds a shield, and heavy leverage raises the chance of distress, which costs value; confirm whether accrued but unpaid interest is deductible under the current tax rules before counting the shield.

    The relationship
    EV=Net debt+Equity1,000=300+700=500+500=542+458\text{EV} = \text{Net debt} + \text{Equity} \qquad 1{,}000 = 300 + 700 = 500 + 500 = 542 + 458
    Net debtborrowings less cash: 300 at the start, 500 after the dividend, 542 after two years of accrual
    Equitywhat is left of enterprise value after the lenders' claim
    What it says in wordsEnterprise value is fixed by the operations; every financing step rearranges the same total between net debt and equity.

    The trap in the question is the word increase. A candidate who hears PIK and reaches for a bigger EV is adding debt to a number that already includes it. The market capitalisation does fall, from 700 to 500 and then 458, and adding net debt of 500 back to a market cap of 500 gives 1000, the same 1,000. The limit: this holds the operating business fixed to isolate the financing; a real company's EV changes every day for other reasons.

    Where candidates lose it

    The common loss is answering that EV rises by Rs 200 crore because debt rose. That double counts: EV already contains net debt, and raising cash against new debt leaves net debt where it was. The candidate has confused enterprise value with gross debt plus equity.

    The second loss is saying the dividend destroys value. It moves Rs 200 crore from inside the company to its owners and leaves them exactly as wealthy; what it changes is the lenders' claim and the risk of the equity, which is the point to make.

    What the interviewer asks next

    • The notes carry a 10% cash coupon instead. How does that change cash, net debt and equity each year?
    • Why might lenders price a PIK note higher than a cash-pay note of the same size?
    • The company uses the Rs 200 crore to buy a business worth Rs 250 crore. What happens to EV and equity now?

    Asked at Moelis & Company, Investment Banking, Los Angeles, 2026 (Wall Street Oasis): Does PIK financing increase or decrease the value of a company's enterprise value?