Finance Interview Glossary
Essential finance terminology for PE, IB, VC, and hedge fund interviews. Master these terms before your interview.
Valuation
DCF (Discounted Cash Flow)
A valuation method that estimates the value of an investment based on its expected future cash flows, discounted to present value using an appropriate discount rate (usually WACC).
Learn more: Walk Me Through a DCFEnterprise Value (EV)
The total value of a business, calculated as market cap plus debt, minority interest, and preferred shares, minus cash and cash equivalents. Represents what it would cost to acquire the entire business.
Learn more: Enterprise Value vs Equity ValueEquity Value
The value of a company's shares outstanding—what equity holders would receive if the company was sold. Also known as market capitalization for public companies.
Learn more: Enterprise Value vs Equity ValueWACC (Weighted Average Cost of Capital)
The average rate a company expects to pay to finance its assets, weighted by the proportion of debt and equity in its capital structure. Used as the discount rate in DCF analysis.
Learn more: WACC Explained SimplyTerminal Value
The value of a business beyond the explicit forecast period in a DCF, calculated using either the Gordon Growth Method (perpetuity) or an Exit Multiple approach.
Learn more: Walk Me Through a DCFEV/EBITDA Multiple
A valuation ratio that compares a company's enterprise value to its EBITDA. Commonly used to compare companies with different capital structures.
Learn more: EV/EBITDA Multiple ExplainedTrading Comps
Comparable company analysis using trading multiples of similar public companies to estimate a target's value. Reflects current market valuations.
Learn more: Trading Comps vs Precedent TransactionsPrecedent Transactions
Valuation method using multiples paid in similar M&A transactions. Includes a control premium and reflects what acquirers actually paid.
Learn more: Trading Comps vs Precedent TransactionsPrivate Equity
LBO (Leveraged Buyout)
An acquisition of a company using a significant amount of borrowed money (debt) to meet the purchase price. The target's assets and cash flows secure and repay the debt.
Learn more: LBO Explained SimplyMOIC (Multiple on Invested Capital)
A measure of investment return calculated as exit value divided by invested capital. A 2.0x MOIC means you doubled your money, regardless of time.
Learn more: 3 Drivers of LBO ReturnsIRR (Internal Rate of Return)
The annualized rate of return that makes the net present value of all cash flows equal to zero. Time-weighted measure of investment performance.
Learn more: 3 Drivers of LBO ReturnsCarry (Carried Interest)
The share of profits that fund managers receive, typically 20% of gains above a hurdle rate. The primary compensation incentive for PE professionals.
Learn more: PE Returns, Risk & Carry ExplainedDPI (Distributions to Paid-In)
A measure of realized returns in PE, calculated as cumulative distributions divided by paid-in capital. Shows actual cash returned to investors.
TVPI (Total Value to Paid-In)
Total fund value (distributions + remaining NAV) divided by paid-in capital. Includes both realized and unrealized returns.
Sources and Uses
The first table in an LBO model showing how the acquisition is financed (sources: debt, equity) and what the funds pay for (uses: purchase price, fees, refinancing).
Learn more: LBO Mechanics ExplainedDebt Paydown (Deleveraging)
Using free cash flow to reduce debt principal over time, increasing equity value at exit. One of the three main drivers of LBO returns.
Learn more: 3 Drivers of LBO ReturnsMultiple Expansion
Selling a company at a higher valuation multiple than the purchase multiple. One of the three drivers of LBO returns.
Learn more: 3 Drivers of LBO ReturnsAccounting
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of operating profitability that removes non-cash charges and financing effects.
Free Cash Flow (FCF)
Cash generated by operations minus capital expenditures. The cash available for distribution to debt holders and equity investors.
Learn more: Cash Flow Statement ExplainedWorking Capital
Current assets minus current liabilities. Represents the capital needed to fund day-to-day operations. Changes in working capital affect cash flow.
Learn more: How the 3 Financial Statements LinkDepreciation
Non-cash expense that allocates the cost of tangible assets over their useful lives. Reduces taxable income but doesn't affect cash flow directly.
Learn more: Depreciation & Amortization ExplainedAmortization
Non-cash expense that allocates the cost of intangible assets over their useful lives. Similar to depreciation but for intangibles like patents and goodwill.
Learn more: Depreciation & Amortization ExplainedCapEx (Capital Expenditures)
Funds used to acquire, upgrade, and maintain physical assets like property, buildings, and equipment. Reduces free cash flow.
M&A
Accretion/Dilution
A deal is accretive if combined EPS exceeds acquirer's standalone EPS; dilutive if combined EPS is lower. Key analysis in M&A transactions.
Learn more: Accretion/Dilution Analysis ExplainedSynergies
Cost savings or revenue enhancements achieved by combining two companies. Can be cost synergies (eliminating redundancies) or revenue synergies (cross-selling).
Learn more: Walk Me Through an M&A Deal ProcessControl Premium
The premium paid above a company's trading price to acquire a controlling stake. Typically 20-40% above the unaffected stock price.
Goodwill
The excess of purchase price over the fair value of identifiable net assets acquired in an M&A transaction. Reflects intangibles like brand value and customer relationships.
IOI (Indication of Interest)
A preliminary, non-binding expression of interest in acquiring a company, typically including an indicative valuation range.
Learn more: PE Deal Process & Due DiligenceLOI (Letter of Intent)
A more serious, often binding document outlining key deal terms and granting exclusivity to negotiate. Comes after IOI in the deal process.
Learn more: PE Deal Process & Due DiligenceVenture Capital
TAM (Total Addressable Market)
The total revenue opportunity available if a product achieved 100% market share. The largest market size metric.
Learn more: TAM SAM SOM Market SizingSAM (Serviceable Addressable Market)
The portion of TAM that can realistically be reached with current products and business model. Smaller than TAM.
Learn more: TAM SAM SOM Market SizingSOM (Serviceable Obtainable Market)
The portion of SAM that can be captured in the near term given resources and competition. The most realistic market size.
Learn more: TAM SAM SOM Market SizingCAC (Customer Acquisition Cost)
Total sales and marketing cost divided by the number of new customers acquired. A key unit economics metric.
Learn more: Startup Unit EconomicsLTV (Lifetime Value)
The total revenue expected from a customer over their relationship with the company. LTV > 3x CAC is typically considered healthy.
Learn more: Startup Unit EconomicsBurn Rate
The rate at which a company spends cash, typically measured monthly. Net burn = cash out - cash in.
Learn more: Startup Unit EconomicsRunway
The amount of time before a company runs out of cash, calculated as cash balance divided by monthly burn rate.
Learn more: Startup Unit EconomicsPre-Money Valuation
The valuation of a company before receiving new investment. Post-money valuation = pre-money + investment amount.
Learn more: VC Term Sheet BasicsPost-Money Valuation
The valuation of a company after receiving new investment. Used to calculate ownership percentage of new investors.
Learn more: VC Term Sheet BasicsLiquidation Preference
A term giving investors priority in receiving proceeds during a liquidity event. Can be 1x (return of investment first) or participating.
Learn more: VC Term Sheet BasicsDilution
The reduction in ownership percentage when new shares are issued. Happens with each funding round.
Learn more: VC Term Sheet BasicsPro-Rata Rights
The right of existing investors to participate in future funding rounds to maintain their ownership percentage.
Learn more: VC Term Sheet BasicsPower Law Returns
The distribution of VC returns where a small number of investments generate the majority of returns. Why VCs need home runs, not singles.
Learn more: VC Portfolio ConstructionHedge Fund
Long/Short Equity
A hedge fund strategy that takes both long positions (betting stocks will rise) and short positions (betting stocks will fall) to generate returns.
Learn more: Hedge Fund Stock Pitch FrameworkAlpha
The excess return of an investment relative to a benchmark index. Positive alpha indicates outperformance.
Beta
A measure of an investment's volatility relative to the market. Beta > 1 means more volatile than the market.
Sharpe Ratio
Risk-adjusted return metric calculated as (return - risk-free rate) / standard deviation. Higher is better.
Drawdown
The peak-to-trough decline in portfolio value before a new peak is achieved. A measure of downside risk.