Wallstreet Prep Valuation Questions
Study online at https://quizlet.com/_czw462
The present value concept is based on
the premise that "a dollar in the present
is worth more than a dollar in the future"
due to the time value of money. The rea-
son being money currently in possession
has the potential to earn interest by being
invested today.
Could you explain the concept of present For intrinsic valuation methods, the value
value and how it relates to company val- of a company will be equal to the sum
uations? of thepresent value of all the future cash
flows it generates. Therefore, a company
with a high valuation would imply it re-
ceives high returns on its invested cap-
ital by investing in positive net present
value ("NPV") projects consistently while
having low risk associated with its cash
flows.
Often used interchangeably with the
term market capitalization ("market
cap"), equity value represents a compa-
ny's value to its equity shareholders. A
company's equity value is calculated by
What is equity value and how is it calcu-
multiplying its latest closing share price
lated?
by its total diluted shares outstanding, as
shown below:
Equity Value = Latest Closing Share
Price × Total Diluted Shares Outstanding
The treasury stock method ("TSM") is
used to calculate the fully diluted num-
ber of shares outstanding based on the
options, warrants, and other dilutive se-
How do you calculate the fully diluted curities that are currently "in-the-money"
number of shares outstanding? (i.e., profitable to exercise).
The TSM involves summing up the num-
ber of in-the-money ("ITM") options and
warrants and then adding that figure to
the number of basic shares outstanding.
, Wallstreet Prep Valuation Questions
Study online at https://quizlet.com/_czw462
In the proceeding step, the TSM as-
sumes the proceeds from exercising
those dilutive options will go towards re-
purchasing stock at the current share
price to reduce the net dilutive impact.
Conceptually, enterprise value ("EV")
represents the value of the operations of
a company to all stakeholders including
common shareholders, preferred share-
holders, and debt lenders.
Thus, enterprise value is considered
capital structure neutral, unlike equity
value, which is affected by financing de-
What is enterprise value and how do you
cisions.
calculate it?
Enterprise value is calculated by taking
the company's equity value and adding
net debt, preferred stock, and minority
interest.
Enterprise Value = Equity Value + Net
Debt + Preferred Stock + Minority Inter-
est
To get to equity value from enter-
prise value, you would first subtract net
debt, where net debt equals the com-
pany's gross debt and debt-like claims
How do you calculate equity value from
(e.g., preferred stock), net of cash, and
enterprise value?
non-operating assets.
Equity Value = Enterprise Value - Net
Debt - Preferred Stock - Minority Interest
The calculation of net debt accounts
for all interest-bearing debt, such as
short-term and long- term loans and
Which line items are included in the cal-
bonds, as well as non-equity financial
culation of net debt?
claims such as preferred stock and non-
controlling interests. From this gross debt
amount, cash and other non-operating
, Wallstreet Prep Valuation Questions
Study online at https://quizlet.com/_czw462
assets such as short-term investments
and equity investments are subtracted to
arrive at net debt.
Net Debt = Total Debt - Cash & Equiva-
lents
The underlying idea of net debt is that
the cash on a company's balance sheet
could pay down the outstanding debt
When calculating enterprise value, why if needed. For this reason, cash and
do we add net debt? cash equivalents are netted against the
company's debt, and many leverage ra-
tios use net debt rather than the gross
amount.
Enterprise value represents all stake-
holders in a business, including equi-
ty shareholders, debt lenders, and pre-
ferred stock owners. Therefore, it's inde-
pendent of the capital structure. In ad-
dition, enterprise value is closer to the
actual value of the business since it ac-
counts for all ownership stakes (as op-
posed to just equity owners).
To tie this to a recent example, many
What is the difference between enter-
investors were astonished that Zoom, a
prise value and equity value?
video conferencing platform, had a high-
er market capitalization than seven of the
largest airlines combined at one point.
The points being neglected were:
1. The equity values of the airline compa-
nies were temporarily deflated given the
travel restrictions, and the government
bailout had not yet been announced.
2. The airlines are significantly more ma-
ture and have far more debt on their bal-
, Wallstreet Prep Valuation Questions
Study online at https://quizlet.com/_czw462
ance sheet (i.e., more non- equity stake-
holders).
Yes, negative net debt just means that a
company has more cash than debt. For
example, both Apple and Microsoft have
massive negative net debt balances be-
cause they hoard cash. In these cases,
companies will have enterprise values
lower than their equity value.
If it seems counter-intuitive that enter-
Could a company have a negative net
prise value can be lower than equity val-
debt balance and have an enterprise val-
ue, remember that enterprise value rep-
ue lower than its equity value?
resents the value of a company's opera-
tions, which excludes any non-operating
assets. When you think about it this way,
it should come as no surprise that com-
panies with much cash (which is treated
as a non-operating asset) will have a
higher equity value than enterprise val-
ue.
While negative enterprise values are a
rare occurrence, it does happen from
Can the enterprise value of a company time to time. A negative enterprise val-
turn negative? ue means a company has a net cash
balance (total cash less total debt) that
exceeds its equity value.
Theoretically, there should be no impact
as enterprise value is capital structure
neutral. The new debt raised shouldn't
impact the enterprise value, as the cash
If a company raises $250 million in ad- and debt balance would increase and
ditional debt, how would its enterprise offset the other entry.
value change? However, the cost of financing (i.e.,
through financing fees and interest ex-
pense) could negatively impact the com-
pany's profitability and lead to a lower
valuation from the higher cost of debt.
Why do we add minority interest to equi-
ty value in the calculation of enterprise
value?
Study online at https://quizlet.com/_czw462
The present value concept is based on
the premise that "a dollar in the present
is worth more than a dollar in the future"
due to the time value of money. The rea-
son being money currently in possession
has the potential to earn interest by being
invested today.
Could you explain the concept of present For intrinsic valuation methods, the value
value and how it relates to company val- of a company will be equal to the sum
uations? of thepresent value of all the future cash
flows it generates. Therefore, a company
with a high valuation would imply it re-
ceives high returns on its invested cap-
ital by investing in positive net present
value ("NPV") projects consistently while
having low risk associated with its cash
flows.
Often used interchangeably with the
term market capitalization ("market
cap"), equity value represents a compa-
ny's value to its equity shareholders. A
company's equity value is calculated by
What is equity value and how is it calcu-
multiplying its latest closing share price
lated?
by its total diluted shares outstanding, as
shown below:
Equity Value = Latest Closing Share
Price × Total Diluted Shares Outstanding
The treasury stock method ("TSM") is
used to calculate the fully diluted num-
ber of shares outstanding based on the
options, warrants, and other dilutive se-
How do you calculate the fully diluted curities that are currently "in-the-money"
number of shares outstanding? (i.e., profitable to exercise).
The TSM involves summing up the num-
ber of in-the-money ("ITM") options and
warrants and then adding that figure to
the number of basic shares outstanding.
, Wallstreet Prep Valuation Questions
Study online at https://quizlet.com/_czw462
In the proceeding step, the TSM as-
sumes the proceeds from exercising
those dilutive options will go towards re-
purchasing stock at the current share
price to reduce the net dilutive impact.
Conceptually, enterprise value ("EV")
represents the value of the operations of
a company to all stakeholders including
common shareholders, preferred share-
holders, and debt lenders.
Thus, enterprise value is considered
capital structure neutral, unlike equity
value, which is affected by financing de-
What is enterprise value and how do you
cisions.
calculate it?
Enterprise value is calculated by taking
the company's equity value and adding
net debt, preferred stock, and minority
interest.
Enterprise Value = Equity Value + Net
Debt + Preferred Stock + Minority Inter-
est
To get to equity value from enter-
prise value, you would first subtract net
debt, where net debt equals the com-
pany's gross debt and debt-like claims
How do you calculate equity value from
(e.g., preferred stock), net of cash, and
enterprise value?
non-operating assets.
Equity Value = Enterprise Value - Net
Debt - Preferred Stock - Minority Interest
The calculation of net debt accounts
for all interest-bearing debt, such as
short-term and long- term loans and
Which line items are included in the cal-
bonds, as well as non-equity financial
culation of net debt?
claims such as preferred stock and non-
controlling interests. From this gross debt
amount, cash and other non-operating
, Wallstreet Prep Valuation Questions
Study online at https://quizlet.com/_czw462
assets such as short-term investments
and equity investments are subtracted to
arrive at net debt.
Net Debt = Total Debt - Cash & Equiva-
lents
The underlying idea of net debt is that
the cash on a company's balance sheet
could pay down the outstanding debt
When calculating enterprise value, why if needed. For this reason, cash and
do we add net debt? cash equivalents are netted against the
company's debt, and many leverage ra-
tios use net debt rather than the gross
amount.
Enterprise value represents all stake-
holders in a business, including equi-
ty shareholders, debt lenders, and pre-
ferred stock owners. Therefore, it's inde-
pendent of the capital structure. In ad-
dition, enterprise value is closer to the
actual value of the business since it ac-
counts for all ownership stakes (as op-
posed to just equity owners).
To tie this to a recent example, many
What is the difference between enter-
investors were astonished that Zoom, a
prise value and equity value?
video conferencing platform, had a high-
er market capitalization than seven of the
largest airlines combined at one point.
The points being neglected were:
1. The equity values of the airline compa-
nies were temporarily deflated given the
travel restrictions, and the government
bailout had not yet been announced.
2. The airlines are significantly more ma-
ture and have far more debt on their bal-
, Wallstreet Prep Valuation Questions
Study online at https://quizlet.com/_czw462
ance sheet (i.e., more non- equity stake-
holders).
Yes, negative net debt just means that a
company has more cash than debt. For
example, both Apple and Microsoft have
massive negative net debt balances be-
cause they hoard cash. In these cases,
companies will have enterprise values
lower than their equity value.
If it seems counter-intuitive that enter-
Could a company have a negative net
prise value can be lower than equity val-
debt balance and have an enterprise val-
ue, remember that enterprise value rep-
ue lower than its equity value?
resents the value of a company's opera-
tions, which excludes any non-operating
assets. When you think about it this way,
it should come as no surprise that com-
panies with much cash (which is treated
as a non-operating asset) will have a
higher equity value than enterprise val-
ue.
While negative enterprise values are a
rare occurrence, it does happen from
Can the enterprise value of a company time to time. A negative enterprise val-
turn negative? ue means a company has a net cash
balance (total cash less total debt) that
exceeds its equity value.
Theoretically, there should be no impact
as enterprise value is capital structure
neutral. The new debt raised shouldn't
impact the enterprise value, as the cash
If a company raises $250 million in ad- and debt balance would increase and
ditional debt, how would its enterprise offset the other entry.
value change? However, the cost of financing (i.e.,
through financing fees and interest ex-
pense) could negatively impact the com-
pany's profitability and lead to a lower
valuation from the higher cost of debt.
Why do we add minority interest to equi-
ty value in the calculation of enterprise
value?
