Module II· Interview Essentials — ValuationIntermediate
Question
Why use the median rather than the mean when determining WACC in a DCF?
Answer
The median is preferred because:
- Robustness against outliers: a single comp with a β of 2.5 or an unusually high capital structure can badly distort the mean. The median is resistant.
- More representative of the typical comp: for a group of 8–12 comps, the median better represents the 'typical' market valuation.
- Banker standard in IB: the median is the default convention in pitch books. The mean can be shown as a cross-check, but the median is the primary output. Variation: some banks use a 'trimmed mean' (excluding the top/bottom 10–20%) — a middle ground between mean and median. Show the quartile range: 25th–75th percentile as the 'reasonable spread', not the full min–max range.
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Pitch tip
'For a skewed comp set (1–2 high-flying tech outliers), use the median and mention the outliers separately — it shows analytical maturity. A junior who naively uses the mean signals inexperience.'