Wallstreet Prep Valuation Questions And Answers 100% PASS 2025/26
1. Couldyouexplaintheconceptofpresentvalueandhowitrelatestocompa- ny I! I! I! I! I! I! I! I! I! I! I! I! I! II!
valuations?:Thepresentvalueconceptisbasedonthepremisethat"adollarin thepresent
I! I! !I !I !I !I !I !I !I !I !I !I !I !I II! !I
isworthmorethanadollarinthefuture"duetothetimevalueofmoney. The reason being
!I !I !I !I !I !I !I !I !I !I !I !I !I !I !I !I II! II! II!
money currently in possession has the potential to earn interest by being invested
II! II! II! II! II! II! II! II! II! II! II! II! II!
today.
II!
For intrinsic valuation methods, the value of a company will be equal to the sum of
II! II! II! II! II! II! II! II! II! II! II! II! II! II! II!
thepresent value of all the future cash flows it generates.Therefore, a company with a
II! II! II! II! II! II! II! II! II! II! !I II! II! II! II!
high valuation would imply it receives high returns on its invested capital by
II! II! II! II! II! II! II! II! II! II! II! II! II!
investinginpositivenetpresentvalue("NPV")projectsconsistentlywhilehavinglow risk !I !I !I !I !I !I !I !I !I !I !I II!
associated with its cash flows.
II! II! II! II! II!
2. What is equity value and how is it calculated?: Often used interchangeably with
II! II! II! II! II! II! II! II! II! II! II! II!
the term market capitalization ("market cap"), equity value represents a com- pany's
II! II! II! II! II! II! II! II! II! II! II! II!
value to its equity shareholders.A company's equity value is calculated by multiplying
II! II! II! II! II! !I II! II! II! II! II! II! II!
its latest closing share price by its total diluted shares outstanding, as shown below:
II! II! II! II! II! II! II! II! II! II! II! II! II! II!
EquityValue = Latest Closing Share Price ×Total Diluted Shares Outstanding
!I II! II! II! II! II! II! !I II! II! II!
3. How do you calculate the fully diluted number of shares outstanding?:The
II! II! II! II! II! II! II! II! II! II! I!
treasurystockmethod("TSM")isusedtocalculatethefullydilutednumberofshares
II! !I !I !I !I !I !I !I !I !I !I !I !I !I
outstanding based on the options, warrants, and other dilutive securities that are
II! II! II! II! II! II! II! II! II! II! II! II!
currently "in-the-money" (i.e., profitable to exercise).
II! II! II! II! II! II!
TheTSM involves summing up the number of in-the-money ("ITM") options and
!I II! II! II! II! II! II! II! II! II! II!
warrants and then adding that figure to the number of basic shares outstanding. In the
II! II! II! II! II! II! II! II! II! II! II! II! II! II! II!
proceeding step, the TSM assumes the proceeds from exercising those dilutive
II! II! II! II! II! II! II! II! II! II! II!
options will go towards repurchasing stock at the current share price to reduce the
II! II! II! II! II! II! II! II! II! II! II! II! II! II!
net dilutive impact.
II! II! II!
4. What is enterprise value and how do you calculate it?: Conceptually, en- II! II! II! II! II! II! II! II! II! II! II!
terprise value ("EV") represents the value of the operations of a company to all
II! II! II! II! II! II! II! II! II! II! II! II! II! II!
stakeholders including common shareholders, preferred shareholders,and debt
II! II! II! II! II! II! II! II!
lenders.
II!
Thus, enterprise value is considered capital structure neutral, unlike equity value, which
II! II! II! II! II! II! II! II! II! II! II!
is affected by financing decisions.
II! II! II! II! II!
Enterprise value is calculated by taking the company's equity value and adding net debt, II! II! II! II! II! II! II! II! II! II! II! II! II!
preferred stock, and minority interest.
II! II! II! II! II!
EnterpriseValue = EquityValue + Net Debt + Preferred Stock + Minority Interest !I II! II! !I II! II! II! II! II! II! II! II! II!
5. How do you calculate equity value from enterprise value?: To get to equity value
II! II! II! II! II! II! II! II! II! II! II! II! II!
fromenterprisevalue,youwouldfirstsubtractnetdebt,wherenetdebtequals the
!I !I !I !I !I !I !I !I !I !I !I !I !I II!
II! II!
, Wallstreet Prep Valuation Questions And Answers 100% PASS 2025/26
company's gross debt and debt-like claims (e.g., preferred stock), net of cash,
II! II! II! II! II! II! II! II! II! II! II! II!
II! II!
, Wallstreet Prep Valuation Questions And Answers 100% PASS 2025/26
and non-operating assets.II! II!
EquityValue = EnterpriseValue - Net Debt - Preferred Stock - Minority Interest
!I II! II! !I II! II! II! II! II! II! II! II! II!
6. Whichlineitemsareincludedinthecalculationofnetdebt?:Thecalculation of net I! I! I! I! I! I! I! I! I! I! I! !I II! II!
debt accounts for all interest-bearing debt, such as short-term and long- term loans and
II! II! II! II! II! II! II! II! II! II! II! II! II! II!
bonds, as well as non-equity financial claims such as preferred stock and non-
II! II! II! II! II! II! II! II! II! II! II! II! II!
controlling interests.From this gross debt amount, cash and other non-operating assets
II! II! I! II! II! II! II! II! II! II! II! II!
such as short-term investments and equity investments are subtracted to arrive at net
II! II! II! II! II! II! II! II! II! II! II! II! II!
debt.
II!
Net Debt =Total Debt - Cash & Equivalents
II! II! !I II! II! II! II! II!
7. Whencalculatingenterprisevalue,whydoweaddnetdebt?:Theunderlying idea of I! I! I! I! I! I! I! I! I! I! !I II! II!
net debt is that the cash on a company's balance sheet could pay down the outstanding
II! II! II! II! II! II! II! II! II! II! II! II! II! II! II! II!
debt if needed.For this reason, cash and cash equivalents are netted against the
II! II! II! !I II! II! II! II! II! II! II! II! II! II!
company's debt, and many leverage ratios use net debt rather than the gross amount.
II! II! II! II! II! II! II! II! II! II! II! II! II! II!
8. What is the difference between enterprise value and equity value?: Enter- prise II! II! II! II! II! II! II! II! II! II! II!
valuerepresentsallstakeholdersinabusiness,includingequityshareholders, debt
!I !I !I !I !I !I !I !I !I !I II!
lenders, and preferred stock owners.Therefore, it's independent of the capital structure.
II! II! II! II! II! !I II! II! II! II! II! II!
In addition, enterprise value is closer to the actual value of the business since it
!I II! II! II! II! II! II! II! II! II! II! II! II! II! II!
accounts for all ownership stakes (as opposed to just equity owners).
II! II! II! II! II! II! II! II! II! II! II!
To tie this to a recent example, many investors were astonished that Zoom, a video
I! I! I! I! I! I! I! I! I! I! I! I! I! I!
conferencing platform, had a higher market capitalization than seven of the largest
II! II! II! II! II! II! II! II! II! II! II! II!
airlines combined at one point.The points being neglected were:
II! II! II! II! II! !I II! II! II! II!
1. The equity values of the airline companies were temporarily deflated given the
II! II! II! II! II! II! II! II! II! II! II!
travel restrictions, and the government bailout had not yet been announced.
II! II! II! II! II! II! II! II! II! II! II!
2. Theairlinesaresignificantlymorematureandhavefarmoredebtontheirbalance sheet
!I !I !I !I !I !I !I !I !I !I !I !I !I II!
(i.e., more non- equity stakeholders).
II! II! II! II! II!
9. Could a company have a negative net debt balance and have an enterprise value II! II! II! II! II! II! II! II! II! II! II! II! II!
lower than its equity value?: Yes, negative net debt just means that a company has
II! II! II! II! II! II! II! II! II! II! II! II! II! II! II!
more cash than debt.For example, both Apple and Microsoft have massive negative net
II! II! II! II! !I II! II! II! II! II! II! II! II! II!
debt balances because they hoard cash.In these cases, companies will have enterprise
II! II! II! II! II! II! I! II! II! II! II! II! II!
values lower than their equity value.
II! II! II! II! II! II!
If it seems counter-intuitive that enterprise value can be lower than equity value,
II! II! II! II! II! II! II! II! II! II! II! II!
remember that enterprise value represents the value of a company's operations,
II! II! II! II! II! II! II! II! II! II! II!
which excludes any non-operating assets.When you think about it this way, it
II! II! II! II! II! !I II! II! II! II! II! II! II!
II! II!
, Wallstreet Prep Valuation Questions And Answers 100% PASS 2025/26
should come as no surprise that companies with much cash (which is treated as a non-
II! II! II! II! II! II! II! II! II! II! II! II! II! II! II!
operating asset) will have a higher equity value than enterprise value. II! II! II! II! II! II! II! II! II! II!
10. Can the enterprise value of a company turn negative?: While negative en-
II! II! II! II! II! II! II! II! II! II! II!
terprise values are a rare occurrence, it does happen from time to time.A negative
II! II! II! II! II! II! II! II! II! II! II! II! II! !I II!
enterprise value means a company has a net cash balance (total cash less total debt)
II! II! II! II! II! II! II! II! II! II! II! II! II! II! II!
that exceeds its equity value.
II! II! II! II! II!
11. If a company raises $250 million in additional debt, how would its enter-
II! II! II! II! II! II! II! II! II! II! II! II!
prise value change?:Theoretically, there should benoimpact asenterprise value is
II! II! II! I! II! II! II! I! I! II! I! II! II!
capital structure neutral.The new debt raised shouldn't impact the enterprise value, as
II! II! II! !I II! II! II! II! II! II! II! II! II!
the cash and debt balance would increase and offset the other entry. However, the cost
II! II! II! II! II! II! II! II! II! II! II! II! II! II! II!
of financing (i.e., through financing fees and interest expense) could negatively impact
II! II! II! II! II! II! II! II! II! II! II! II!
the company's profitability and lead to a lower valuation from the higher cost of debt.
II! II! II! II! II! II! II! II! II! II! II! II! II! II! II!
12. Why do we add minority interest to equity value in the calculation of II! II! II! II! II! II! II! II! II! II! II! II!
enterprise value?:Minority interest represents the portion of a subsidiary in which the
II! II! I! II! II! II! II! II! II! II! II! II! II!
parentcompanydoesn'town.UnderUSGAAP,ifacompanyhasownershipover 50% of
!I !I !I !I !I !I !I !I !I !I !I !I !I II! II!
another company but below 100% (called a "minority interest"
II! II! II! II! II! II! II! II! II!
or "non-controlling investment"), it must include 100% of the subsidiary's financials in
II! II! II! II! II! II! II! II! II! II! II!
their financial statements despite not owning 100%.
II! II! II! II! II! II! II!
WhencalculatingmultiplesusingEV,thenumeratorwillbetheconsolidatedmetric, thus
!I !I !I !I !I !I !I !I !I !I !I II!
minority interest must be added to enterprise value for the multiple to be compatible
II! II! II! II! II! II! II! II! II! II! II! II! II! II!
(i.e., no mismatch between the numerator and denominator).
II! II! II! II! II! II! II! II!
13. Howare convertiblebonds andpreferredequity withaconvertible feature I! I! I! I! II! I! I! I! I! I!
accounted for when calculating enterprise value?:If the convertible bonds and the
II! II! II! II! II! II! I! II! II! II! II! II!
preferred equities are "in-the-money" as of thevaluation date (i.e., the current stock
II! II! II! II! II! II! II! II! II! II! II! II!
price is greater than their strike price), then the treatment will be the same as additional
II! II! II! II! II! II! II! II! II! II! II! II! II! II! II! II!
dilutionfromequity.However,ifthey're"out-of-the-money,"theywouldbe treated as a
!I !I !I !I !I !I !I !I !I !I II! II! II!
financial liability (similar to debt).
II! II! II! II! II!
14. What are the two main approaches to valuation?: Intrinsic Valuation: For an II! II! II! II! II! II! II! I! !I !I II!
intrinsic valuation, the value of a business is arrived at by looking at the business's
II! II! II! II! II! II! II! II! II! II! II! II! II! II! II!
ability to generate cash flows. The discounted cash flow method is the most common type of
II! !I !I !I !I !I !I !I !I !I !I !I !I !I II! II!
intrinsic valuation and is based on the notion that a business's value equals the present
II! II! II! II! II! II! II! II! II! II! II! II! II! II! II!
value of its future free cash flows.
II! II! II! II! II! II! II!
RelativeValuation:Inrelativevaluation,abusiness'svalueisarrivedatbylookingat !I !I !I !I !I !I !I !I !I !I !I !I !I
comparable companies and applyingthe averageormedian multiples derived from the
II! I! II! II! I! II! II! II! II! II! I! II!
peergroup-oftenEV/EBITDA,P/E,orsomeotherrelevantmultipletovaluethe target.This
!I !I !I !I !I !I !I !I !I !I !I !I !I !I II! !I
valuation can be done by looking at the multiples of comparable public companies using
II! II! II! II! II! II! II! II! II! II! II! II! II! II!
theircurrentmarket values, whichiscalled "trading comps," orby
I! I! II! II! II! II! I! II! I! II! II!
II! II!
1. Couldyouexplaintheconceptofpresentvalueandhowitrelatestocompa- ny I! I! I! I! I! I! I! I! I! I! I! I! I! II!
valuations?:Thepresentvalueconceptisbasedonthepremisethat"adollarin thepresent
I! I! !I !I !I !I !I !I !I !I !I !I !I !I II! !I
isworthmorethanadollarinthefuture"duetothetimevalueofmoney. The reason being
!I !I !I !I !I !I !I !I !I !I !I !I !I !I !I !I II! II! II!
money currently in possession has the potential to earn interest by being invested
II! II! II! II! II! II! II! II! II! II! II! II! II!
today.
II!
For intrinsic valuation methods, the value of a company will be equal to the sum of
II! II! II! II! II! II! II! II! II! II! II! II! II! II! II!
thepresent value of all the future cash flows it generates.Therefore, a company with a
II! II! II! II! II! II! II! II! II! II! !I II! II! II! II!
high valuation would imply it receives high returns on its invested capital by
II! II! II! II! II! II! II! II! II! II! II! II! II!
investinginpositivenetpresentvalue("NPV")projectsconsistentlywhilehavinglow risk !I !I !I !I !I !I !I !I !I !I !I II!
associated with its cash flows.
II! II! II! II! II!
2. What is equity value and how is it calculated?: Often used interchangeably with
II! II! II! II! II! II! II! II! II! II! II! II!
the term market capitalization ("market cap"), equity value represents a com- pany's
II! II! II! II! II! II! II! II! II! II! II! II!
value to its equity shareholders.A company's equity value is calculated by multiplying
II! II! II! II! II! !I II! II! II! II! II! II! II!
its latest closing share price by its total diluted shares outstanding, as shown below:
II! II! II! II! II! II! II! II! II! II! II! II! II! II!
EquityValue = Latest Closing Share Price ×Total Diluted Shares Outstanding
!I II! II! II! II! II! II! !I II! II! II!
3. How do you calculate the fully diluted number of shares outstanding?:The
II! II! II! II! II! II! II! II! II! II! I!
treasurystockmethod("TSM")isusedtocalculatethefullydilutednumberofshares
II! !I !I !I !I !I !I !I !I !I !I !I !I !I
outstanding based on the options, warrants, and other dilutive securities that are
II! II! II! II! II! II! II! II! II! II! II! II!
currently "in-the-money" (i.e., profitable to exercise).
II! II! II! II! II! II!
TheTSM involves summing up the number of in-the-money ("ITM") options and
!I II! II! II! II! II! II! II! II! II! II!
warrants and then adding that figure to the number of basic shares outstanding. In the
II! II! II! II! II! II! II! II! II! II! II! II! II! II! II!
proceeding step, the TSM assumes the proceeds from exercising those dilutive
II! II! II! II! II! II! II! II! II! II! II!
options will go towards repurchasing stock at the current share price to reduce the
II! II! II! II! II! II! II! II! II! II! II! II! II! II!
net dilutive impact.
II! II! II!
4. What is enterprise value and how do you calculate it?: Conceptually, en- II! II! II! II! II! II! II! II! II! II! II!
terprise value ("EV") represents the value of the operations of a company to all
II! II! II! II! II! II! II! II! II! II! II! II! II! II!
stakeholders including common shareholders, preferred shareholders,and debt
II! II! II! II! II! II! II! II!
lenders.
II!
Thus, enterprise value is considered capital structure neutral, unlike equity value, which
II! II! II! II! II! II! II! II! II! II! II!
is affected by financing decisions.
II! II! II! II! II!
Enterprise value is calculated by taking the company's equity value and adding net debt, II! II! II! II! II! II! II! II! II! II! II! II! II!
preferred stock, and minority interest.
II! II! II! II! II!
EnterpriseValue = EquityValue + Net Debt + Preferred Stock + Minority Interest !I II! II! !I II! II! II! II! II! II! II! II! II!
5. How do you calculate equity value from enterprise value?: To get to equity value
II! II! II! II! II! II! II! II! II! II! II! II! II!
fromenterprisevalue,youwouldfirstsubtractnetdebt,wherenetdebtequals the
!I !I !I !I !I !I !I !I !I !I !I !I !I II!
II! II!
, Wallstreet Prep Valuation Questions And Answers 100% PASS 2025/26
company's gross debt and debt-like claims (e.g., preferred stock), net of cash,
II! II! II! II! II! II! II! II! II! II! II! II!
II! II!
, Wallstreet Prep Valuation Questions And Answers 100% PASS 2025/26
and non-operating assets.II! II!
EquityValue = EnterpriseValue - Net Debt - Preferred Stock - Minority Interest
!I II! II! !I II! II! II! II! II! II! II! II! II!
6. Whichlineitemsareincludedinthecalculationofnetdebt?:Thecalculation of net I! I! I! I! I! I! I! I! I! I! I! !I II! II!
debt accounts for all interest-bearing debt, such as short-term and long- term loans and
II! II! II! II! II! II! II! II! II! II! II! II! II! II!
bonds, as well as non-equity financial claims such as preferred stock and non-
II! II! II! II! II! II! II! II! II! II! II! II! II!
controlling interests.From this gross debt amount, cash and other non-operating assets
II! II! I! II! II! II! II! II! II! II! II! II!
such as short-term investments and equity investments are subtracted to arrive at net
II! II! II! II! II! II! II! II! II! II! II! II! II!
debt.
II!
Net Debt =Total Debt - Cash & Equivalents
II! II! !I II! II! II! II! II!
7. Whencalculatingenterprisevalue,whydoweaddnetdebt?:Theunderlying idea of I! I! I! I! I! I! I! I! I! I! !I II! II!
net debt is that the cash on a company's balance sheet could pay down the outstanding
II! II! II! II! II! II! II! II! II! II! II! II! II! II! II! II!
debt if needed.For this reason, cash and cash equivalents are netted against the
II! II! II! !I II! II! II! II! II! II! II! II! II! II!
company's debt, and many leverage ratios use net debt rather than the gross amount.
II! II! II! II! II! II! II! II! II! II! II! II! II! II!
8. What is the difference between enterprise value and equity value?: Enter- prise II! II! II! II! II! II! II! II! II! II! II!
valuerepresentsallstakeholdersinabusiness,includingequityshareholders, debt
!I !I !I !I !I !I !I !I !I !I II!
lenders, and preferred stock owners.Therefore, it's independent of the capital structure.
II! II! II! II! II! !I II! II! II! II! II! II!
In addition, enterprise value is closer to the actual value of the business since it
!I II! II! II! II! II! II! II! II! II! II! II! II! II! II!
accounts for all ownership stakes (as opposed to just equity owners).
II! II! II! II! II! II! II! II! II! II! II!
To tie this to a recent example, many investors were astonished that Zoom, a video
I! I! I! I! I! I! I! I! I! I! I! I! I! I!
conferencing platform, had a higher market capitalization than seven of the largest
II! II! II! II! II! II! II! II! II! II! II! II!
airlines combined at one point.The points being neglected were:
II! II! II! II! II! !I II! II! II! II!
1. The equity values of the airline companies were temporarily deflated given the
II! II! II! II! II! II! II! II! II! II! II!
travel restrictions, and the government bailout had not yet been announced.
II! II! II! II! II! II! II! II! II! II! II!
2. Theairlinesaresignificantlymorematureandhavefarmoredebtontheirbalance sheet
!I !I !I !I !I !I !I !I !I !I !I !I !I II!
(i.e., more non- equity stakeholders).
II! II! II! II! II!
9. Could a company have a negative net debt balance and have an enterprise value II! II! II! II! II! II! II! II! II! II! II! II! II!
lower than its equity value?: Yes, negative net debt just means that a company has
II! II! II! II! II! II! II! II! II! II! II! II! II! II! II!
more cash than debt.For example, both Apple and Microsoft have massive negative net
II! II! II! II! !I II! II! II! II! II! II! II! II! II!
debt balances because they hoard cash.In these cases, companies will have enterprise
II! II! II! II! II! II! I! II! II! II! II! II! II!
values lower than their equity value.
II! II! II! II! II! II!
If it seems counter-intuitive that enterprise value can be lower than equity value,
II! II! II! II! II! II! II! II! II! II! II! II!
remember that enterprise value represents the value of a company's operations,
II! II! II! II! II! II! II! II! II! II! II!
which excludes any non-operating assets.When you think about it this way, it
II! II! II! II! II! !I II! II! II! II! II! II! II!
II! II!
, Wallstreet Prep Valuation Questions And Answers 100% PASS 2025/26
should come as no surprise that companies with much cash (which is treated as a non-
II! II! II! II! II! II! II! II! II! II! II! II! II! II! II!
operating asset) will have a higher equity value than enterprise value. II! II! II! II! II! II! II! II! II! II!
10. Can the enterprise value of a company turn negative?: While negative en-
II! II! II! II! II! II! II! II! II! II! II!
terprise values are a rare occurrence, it does happen from time to time.A negative
II! II! II! II! II! II! II! II! II! II! II! II! II! !I II!
enterprise value means a company has a net cash balance (total cash less total debt)
II! II! II! II! II! II! II! II! II! II! II! II! II! II! II!
that exceeds its equity value.
II! II! II! II! II!
11. If a company raises $250 million in additional debt, how would its enter-
II! II! II! II! II! II! II! II! II! II! II! II!
prise value change?:Theoretically, there should benoimpact asenterprise value is
II! II! II! I! II! II! II! I! I! II! I! II! II!
capital structure neutral.The new debt raised shouldn't impact the enterprise value, as
II! II! II! !I II! II! II! II! II! II! II! II! II!
the cash and debt balance would increase and offset the other entry. However, the cost
II! II! II! II! II! II! II! II! II! II! II! II! II! II! II!
of financing (i.e., through financing fees and interest expense) could negatively impact
II! II! II! II! II! II! II! II! II! II! II! II!
the company's profitability and lead to a lower valuation from the higher cost of debt.
II! II! II! II! II! II! II! II! II! II! II! II! II! II! II!
12. Why do we add minority interest to equity value in the calculation of II! II! II! II! II! II! II! II! II! II! II! II!
enterprise value?:Minority interest represents the portion of a subsidiary in which the
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parentcompanydoesn'town.UnderUSGAAP,ifacompanyhasownershipover 50% of
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another company but below 100% (called a "minority interest"
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or "non-controlling investment"), it must include 100% of the subsidiary's financials in
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their financial statements despite not owning 100%.
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WhencalculatingmultiplesusingEV,thenumeratorwillbetheconsolidatedmetric, thus
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minority interest must be added to enterprise value for the multiple to be compatible
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(i.e., no mismatch between the numerator and denominator).
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13. Howare convertiblebonds andpreferredequity withaconvertible feature I! I! I! I! II! I! I! I! I! I!
accounted for when calculating enterprise value?:If the convertible bonds and the
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preferred equities are "in-the-money" as of thevaluation date (i.e., the current stock
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price is greater than their strike price), then the treatment will be the same as additional
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dilutionfromequity.However,ifthey're"out-of-the-money,"theywouldbe treated as a
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financial liability (similar to debt).
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14. What are the two main approaches to valuation?: Intrinsic Valuation: For an II! II! II! II! II! II! II! I! !I !I II!
intrinsic valuation, the value of a business is arrived at by looking at the business's
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ability to generate cash flows. The discounted cash flow method is the most common type of
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intrinsic valuation and is based on the notion that a business's value equals the present
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value of its future free cash flows.
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RelativeValuation:Inrelativevaluation,abusiness'svalueisarrivedatbylookingat !I !I !I !I !I !I !I !I !I !I !I !I !I
comparable companies and applyingthe averageormedian multiples derived from the
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peergroup-oftenEV/EBITDA,P/E,orsomeotherrelevantmultipletovaluethe target.This
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valuation can be done by looking at the multiples of comparable public companies using
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theircurrentmarket values, whichiscalled "trading comps," orby
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II! II!
