WALL STREET PREP EXAM 2026 UPDATE QUESTIONS
AND CORRECT VEIFIED ANSWERS ALREADY GRADED A+
(BRAND NEW VISION)
How do you value a company? - ANS-Intrinsic value (DCF): This approach is the more
academically respected approach. The DCF says that the value of a productive asset equals
the present value of its cash flows. The answer should run along the line of "project free cash
flows for 5-20 years, depending on the availability and reliability of information, and then
calculate a terminal value. Discount both the free cash flow projections and terminal value by
an appropriate cost of capital (weighted average cost of capital for unlevered DCF and cost of
equity for levered DCF). In an unlevered DCF (the more common approach) this will yield the
company's enterprise value (aka firm and transaction value), from which we need to subtract
net debt to arrive at equity value. Divide equity value by diluted shares outstanding to arrive
at equity value per share.
Relative valuation (Multiples): The second approach involves determining a comparable peer
group - companies that are in the same industry with similar operational, growth, risk, and
return on capital characteristics. Truly identical companies of course do not exist, but you
should attempt to find as close to comparable companies as possible. Calculate appropriate
industry multiples. Apply the median of these multiples on the relevant operating metric of
the target company to arrive at a valuation. Common multiples are EV/Rev, EV/EBITDA, P/E,
P/Book, although some industries place more emphasis on some multiples vs. others, while
other industries use different valuation multiples altogether. It is not a bad idea to research an
industry or two (the easiest way is to read an industry report by a sell-side analyst) before the
interview to anticipate a follow-up question like "tell me about a particular industry you are
interested in and the valuation multiples commonly used."
What is the appropriate discount rate to use in an unlevered DCF analysis? - ANS-Since the free
cash flows in an unlevered DCF analysis are pre-debt (i.e. a helpful way to think about this is
to think of unlevered cash flows as the company's cash flows as if it had no debt - so no
interest expense, and no tax benefit from that interest expense), the cost of the cash flows
relate to both the lenders and the equity providers of capital. Thus, the discount rate is the
weighted average cost of capital to all providers of capital (both debt and equity).
, The cost of debt is readily observable in the market as the yield on debt with equivalent risk,
while the cost of equity is more difficult to estimate.
Cost of equity is typically estimated using the capital asset pricing model (CAPM), which links
the expected return of equity to its sensitivity to the overall market (see WSP's DCF module
for a detailed analysis of calculating the cost of equity).
What is typically higher - the cost of debt or the cost of equity? - ANS-The cost of equity is
higher than the cost of debt because the cost associated with borrowing debt (interest
expense) is tax deductible, creating a tax shield. Additionally, the cost of equity is typically
higher because unlike lenders, equity investors are not guaranteed fixed payments, and are
last in line at liquidation.
How do you calculate the cost of equity? - ANS-There are several competing models for
estimating the cost of equity, however, the capital asset pricing model (CAPM) is
predominantly used on the street. The CAPM links the expected return of a security to its
sensitivity the overall market basket (often proxied using the S&P 500). The formula is: Cost of
equity (re) = Risk free rate (rf) + β x Market risk premium (rm-rf )
Risk free rate: The risk free rate should theoretically reflect yield to maturity of a default-free
government bonds of equivalent maturity to the duration of each cash flows being
discounted. In practice, lack of liquidity in long term bonds have made the current yield on 10-
year U.S. Treasury bonds as the preferred proxy for the risk-free rate for US companies.
Market risk premium: The market risk premium (rm-rf) represents the excess returns of
investing in stocks over the risk free rate. Practitioners often use the historical excess returns
method, and compare historical spreads between S&P 500 returns and the yield on 10 year
treasury bonds.
Beta (β): Beta provides a method to estimate the degree of an asset's systematic (non-
diversifiable) risk. Beta equals the covariance between expected returns on the asset and on
the stock market, divided by the variance of expected returns on the stock market. A
company whose equity has a beta of 1.0 is "as risky" as the overall stock market and should
therefore be expected to provide returns to investors that rise and fall as fast as the stock
AND CORRECT VEIFIED ANSWERS ALREADY GRADED A+
(BRAND NEW VISION)
How do you value a company? - ANS-Intrinsic value (DCF): This approach is the more
academically respected approach. The DCF says that the value of a productive asset equals
the present value of its cash flows. The answer should run along the line of "project free cash
flows for 5-20 years, depending on the availability and reliability of information, and then
calculate a terminal value. Discount both the free cash flow projections and terminal value by
an appropriate cost of capital (weighted average cost of capital for unlevered DCF and cost of
equity for levered DCF). In an unlevered DCF (the more common approach) this will yield the
company's enterprise value (aka firm and transaction value), from which we need to subtract
net debt to arrive at equity value. Divide equity value by diluted shares outstanding to arrive
at equity value per share.
Relative valuation (Multiples): The second approach involves determining a comparable peer
group - companies that are in the same industry with similar operational, growth, risk, and
return on capital characteristics. Truly identical companies of course do not exist, but you
should attempt to find as close to comparable companies as possible. Calculate appropriate
industry multiples. Apply the median of these multiples on the relevant operating metric of
the target company to arrive at a valuation. Common multiples are EV/Rev, EV/EBITDA, P/E,
P/Book, although some industries place more emphasis on some multiples vs. others, while
other industries use different valuation multiples altogether. It is not a bad idea to research an
industry or two (the easiest way is to read an industry report by a sell-side analyst) before the
interview to anticipate a follow-up question like "tell me about a particular industry you are
interested in and the valuation multiples commonly used."
What is the appropriate discount rate to use in an unlevered DCF analysis? - ANS-Since the free
cash flows in an unlevered DCF analysis are pre-debt (i.e. a helpful way to think about this is
to think of unlevered cash flows as the company's cash flows as if it had no debt - so no
interest expense, and no tax benefit from that interest expense), the cost of the cash flows
relate to both the lenders and the equity providers of capital. Thus, the discount rate is the
weighted average cost of capital to all providers of capital (both debt and equity).
, The cost of debt is readily observable in the market as the yield on debt with equivalent risk,
while the cost of equity is more difficult to estimate.
Cost of equity is typically estimated using the capital asset pricing model (CAPM), which links
the expected return of equity to its sensitivity to the overall market (see WSP's DCF module
for a detailed analysis of calculating the cost of equity).
What is typically higher - the cost of debt or the cost of equity? - ANS-The cost of equity is
higher than the cost of debt because the cost associated with borrowing debt (interest
expense) is tax deductible, creating a tax shield. Additionally, the cost of equity is typically
higher because unlike lenders, equity investors are not guaranteed fixed payments, and are
last in line at liquidation.
How do you calculate the cost of equity? - ANS-There are several competing models for
estimating the cost of equity, however, the capital asset pricing model (CAPM) is
predominantly used on the street. The CAPM links the expected return of a security to its
sensitivity the overall market basket (often proxied using the S&P 500). The formula is: Cost of
equity (re) = Risk free rate (rf) + β x Market risk premium (rm-rf )
Risk free rate: The risk free rate should theoretically reflect yield to maturity of a default-free
government bonds of equivalent maturity to the duration of each cash flows being
discounted. In practice, lack of liquidity in long term bonds have made the current yield on 10-
year U.S. Treasury bonds as the preferred proxy for the risk-free rate for US companies.
Market risk premium: The market risk premium (rm-rf) represents the excess returns of
investing in stocks over the risk free rate. Practitioners often use the historical excess returns
method, and compare historical spreads between S&P 500 returns and the yield on 10 year
treasury bonds.
Beta (β): Beta provides a method to estimate the degree of an asset's systematic (non-
diversifiable) risk. Beta equals the covariance between expected returns on the asset and on
the stock market, divided by the variance of expected returns on the stock market. A
company whose equity has a beta of 1.0 is "as risky" as the overall stock market and should
therefore be expected to provide returns to investors that rise and fall as fast as the stock
