Wallstreet Prep Valuation Questions And Answers

Il`Il`Il`Il`Il`Il`Il`Il`Il`Il`Il`Il`Il`Il` WallstreetPrepValuationQuestions And Answers 2025/2026 NEWEST Il̀ Il̀ Il̀ Il` Il` Il` Il`




1. Couldyouexplaintheconceptofpresentvalueandhowitrelatestocompa- Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀




nyvaluations?:Thepresentvalueconceptisbasedonthepremisethat"adollarin theprese
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ntisworthmorethanadollarinthefuture"duetothetimevalueofmoney. The reason being
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money currently in possession has the potential to earn interest by being invested today. Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il`




For intrinsic valuation methods, the value of a company will be equal to the sum ofthepr
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esent value of all the future cash flows it generates.Therefore, a company with a high valu
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ation would imply it receives high returns on its invested capital by
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investinginpositivenetpresentvalue("NPV")projectsconsistentlywhilehavinglow risk a Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il` Il`




ssociated with its cash flows. Il` Il` Il` Il`




2. What is equity value and how is it calculated?: Often used interchangeably with th Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il`




e term market capitalization ("market cap"), equity value represents a com-
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pany's value to its equity shareholders.A company's equity value is calculated by multi
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plying its latest closing share price by its total diluted shares outstanding, as shown bel
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ow:

EquityValue = Latest Closing Share Price ×Total Diluted Shares Outstanding Il̀ Il` Il` Il` Il` Il` Il` Il̀ Il` Il` Il`




3. How do you calculate the fully diluted number of shares outstanding?:The treasur Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il̀ Il`




ystockmethod("TSM")isusedtocalculatethefullydilutednumberofshares outstanding ba
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sed on the options, warrants, and other dilutive securities that are currently "in-the-
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money" (i.e., profitable to exercise). Il` Il` Il` Il`




TheTSM involves summing up the number of in-the- Il̀ Il` Il` Il` Il` Il` Il` Il`




money ("ITM") options and warrants and then adding that figure to the number of basic Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il`




shares outstanding. In the proceeding step, the TSM assumes the proceeds from exerci Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il`




sing those dilutive options will go towards repurchasing stock at the current share pric
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e to reduce the net dilutive impact.
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4. What is enterprise value and how do you calculate it?:Conceptually, en- Il` Il` Il` Il` Il` Il` Il` Il` Il` Il̀ Il`




terprise value ("EV") represents the value of the operations of a company to all stake
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holders includingcommonshareholders, preferred shareholders,and debt lenders. Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il`




Thus, enterprise value is considered capital structure neutral, unlike equity value, which
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is affected by financing decisions.
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Enterprise value is calculated by taking the company's equity value and adding net debt, p Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il`




referred stock, and minority interest. Il` Il` Il` Il`




EnterpriseValue = EquityValue + Net Debt + Preferred Stock + Minority Interest Il̀ Il` Il` Il̀ Il` Il` Il` Il` Il` Il` Il` Il` Il`




5. How do you calculate equity value from enterprise value?: To get to equity valuefr Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il̀




omenterprisevalue,youwouldfirstsubtractnetdebt,wherenetdebtequals the company's
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,l` gross debt and debt-like claims (e.g., preferred stock), net of cash,
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,and non-operating assets. Il` Il`




EquityValue = EnterpriseValue - Net Debt - Preferred Stock - Minority Interest Il̀ Il` Il` Il̀ Il` Il` Il` Il` Il` Il` Il` Il` Il`




6. Whichlineitemsareincludedinthecalculationofnetdebt?:Thecalculation of net de Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il` Il` Il`




bt accounts for all interest-bearing debt, such as short-term and long-
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term loans and bonds, as well as non-
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equity financial claims such as preferred stock and non- Il` Il` Il` Il` Il` Il` Il` Il`




controlling interests.From this gross debt amount, cash and other non-
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operating assets such as short- Il` Il` Il` Il`




term investments and equity investments are subtracted to arrive at net debt.
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Net Debt =Total Debt - Cash & Equivalents
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7. Whencalculatingenterprisevalue,whydoweaddnetdebt?:Theunderlying idea of Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il` Il` Il`




net debt is that the cash on a company's balance sheet could pay down the outstanding deb
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t if needed.For this reason, cash and cash equivalents are netted against the company's de
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bt, and many leverage ratios use net debt rather than the gross amount.
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8. What is the difference between enterprise value and equity value?: Enter- Il` Il` Il` Il` Il` Il` Il` Il` Il` Il`




prisevaluerepresentsallstakeholdersinabusiness,includingequityshareholders, debt le
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nders, and preferred stock owners.Therefore, it's independent of the capital structure.InIl` Il` Il` Il` Il̀ Il` Il` Il` Il` Il` Il` Il̀ Il`




addition, enterprise value is closer to the actual value of the business since it accounts for Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il`




all ownership stakes (as opposed to just equity owners).
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Totiethistoarecentexample,manyinvestorswereastonishedthatZoom,avideo conferen
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cing platform, had a higher market capitalization than seven of the largest airlines combi
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ned at one point.The points being neglected were:
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1. The equity values of the airline companies were temporarily deflated given the travel Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` I




restrictions, and the government bailout had not yet been announced.
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2. Theairlinesaresignificantlymorematureandhavefarmoredebtontheirbalance sheet (i Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il` Il`




.e., more non- equity stakeholders).
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9. Could a company have a negative net debt balance and have an enterprise value l Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il`




ower than its equity value?: Yes, negative net debt just means that a company has more
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cash than debt.For example, both Apple and Microsoft have massive negative net debt ba
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lances because they hoard cash.In these cases, companies will have enterprise values lo Il` Il` Il` Il` Il̀ Il` Il` Il` Il` Il` Il` Il` Il`




wer than their equity value. Il` Il` Il` Il`




If it seems counter-
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intuitive that enterprise value can be lower than equity value, remember that enterpri Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il`




se value represents the value of a company's operations, which excludes any non-
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operating assets.When you think about it this way, it Il` Il̀ Il` Il` Il` Il` Il` Il` Il`






, should come as no surprise that companies with much cash (which is treated as a non- Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il`




operating asset) will have a higher equity value than enterprise value. Il` Il` Il` Il` Il` Il` Il` Il` Il` Il`




10. Can the enterprise value of a company turn negative?: While negative en- Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il`




terprise values are a rare occurrence, it does happen from time to time.A negative enterpr
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ise value means a company has a net cash balance (total cash less total debt) that exceeds
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its equity value. Il` Il`




11. If a company raises $250 million in additional debt, how would its enter-
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prise value change?:Theoretically,thereshould benoimpactasenterprisevalue is capita
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l structure neutral.The new debt raised shouldn't impact the enterprise value, as the cas
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h and debt balance would increase and offset the other entry. However, the cost of financi
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ng (i.e., through financing fees and interest expense) could negatively impact the compa
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ny's profitability and lead to a lower valuation from the higher cost of debt.
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12. Why do we add minority interest to equity value in the calculation of enterpris Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il`




e value?:Minority interest represents the portion of a subsidiary in which theparentcomp
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anydoesn'town.UnderUSGAAP,ifacompanyhasownershipover 50% of another company
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but below 100% (called a "minority interest"
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or "non- Il`




controlling investment"), it must include 100% of the subsidiary's financials in their finan Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il`




cial statements despite not owning 100%. Il` Il` Il` Il` Il`




WhencalculatingmultiplesusingEV,thenumeratorwillbetheconsolidatedmetric, thus m
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inority interest must be added to enterprise value for the multiple to be compatible (i.e.,
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no mismatch between the numerator and denominator).
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13. Howareconvertiblebondsandpreferredequitywithaconvertiblefeature acco Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il`




unted for when calculating enterprise value?:If the convertible bonds and the preferr
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ed equities are "in-the- Il` Il` Il`




money" as of thevaluation date (i.e., the current stock price is greater than their strike pric Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il` Il`




e), then the treatment will be the same as additionaldilutionfromequity.However,ifthey'r
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e"out-of-the-money,"theywouldbe treated as a financial liability (similar to debt).
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14. What are the two main approaches to valuation?:IntrinsicValuation:For an intrin Il` Il` Il` Il` Il` Il` Il` Il̀ Il̀ Il̀ Il` Il`




sic valuation, the value of a business is arrived at by looking at the business's abilitytogen
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eratecashflows.Thediscountedcashflowmethodisthemostcommon type of intrinsic valu
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ation and is based on the notion that a business's value equals the present value of its futur
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e free cash flows.
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RelativeValuation:Inrelativevaluation,abusiness'svalueisarrivedatbylookingat compa Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il̀ Il`




rablecompaniesand applyingtheaverageormedianmultiplesderivedfrom thepeergrou
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p- Il̀




oftenEV/EBITDA,P/E,orsomeotherrelevantmultipletovaluethe target.This valuation ca
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n be done by looking at the multiples of comparable public companiesusingtheircurrent
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