WALL STREET PREP PREMIUM FINAL
TEST 2026 QUESTIONS WITH
CORRECT ANSWERS GRADED A+
◍ A company with $100 million in net income and a P/E multiple of 15x is
considering raising $200 million in debt to pay out a one-time cash
dividend. How would you decide if this is a good idea?.
Answer: If we assume that the P/E multiple stays the same after the dividend
and a cost of debt of 5%, the impact to shareholders is as follows:- Net
income drops from $100 million to $90 million [($200 million new
borrowing x 5%) = $10 million]- Equity value drops from $1,500 million
(15 x $100 million) to $1,350 million (15.0 x $90 million)Although there's a
tax impact since interest is mostly deductible, it can be ignored for
interviewing purposes. That's a $150 million drop in equity value. However,
shareholders are immediately getting $200 million.So ignoring any tax
impact, there's a net benefit of $50 million ($200 million - $150 million) to
shareholders.The assumptions we made about taxes, the cost of debt and the
multiple staying the same all affect the result. If any of those variables were
different - for example, if the cost of debt was higher - the equity value
might be wiped out in light of this move. A key assumption in getting the
answer here was that P/E ratios would remain the same at 15x. A company's
P/E multiple is a function of its growth prospects, ROE, and cost of equity.
Hence, borrowing more with no compensatory increase in investment or
growth raises the cost of equity via a higher beta, which will pressure the
P/E multiple down.While it appears based on our assumptions that this is a
decent idea, it could easily be a bad idea given a different set of
assumptions. It's possible that borrowing for the sake of issuing dividends is
unsustainable indefinitely because eventually, debt levels will rise to a point
where the cost of capital and P/E ratios are adversely affected. Broadly, debt
, should support investments and activities that will lead to firm and
shareholder value creation rather than extract cash from the business.
◍ Why do we add minority interest to equity value in the calculation of
enterprise value?.
Answer: Minority interest represents the portion of a subsidiary in which the
parent company doesn't own. Under US GAAP, if a company has ownership
over 50% of another company but below 100% (called a "minority
interest"or "non-controlling investment"), it must include 100% of the
subsidiary's financials in their financial statements despite not owning
100%.When calculating multiples using EV, the numerator will be the
consolidated metric, thus minority interest must be added to enterprise value
for the multiple to be compatible (i.e., no mismatch between the numerator
and denominator).
◍ How would you handle restricted stock in the share count?.
Answer: Some finance professionals completely ignore restricted stock from
the diluted share count because they're unvested. However, increasingly,
unvested restricted stock is included in the diluted share count under the
logic that eventually they'll vest, and it's thus more conservative to count
them.
◍ What is the argument against using the exit multiple approach in a DCF?.
Answer: In theory, a DCF is an intrinsic, cash-flow based valuation method
independent of the market. By using the exit multiple approach, relative
valuation is being brought into the valuation. However, the exit multiple
approach is widely used in practice due to being easier to discuss and defend
in terms of justifying the assumptions used.
◍ Should the target company being valued be included in its peer group?.
Answer: Many professionals exclude the target company being valued from
the peer group because the target's inclusion would skew the multiple
towards the target's current valuation. However, if the intuition behind a
comps analysis is that the market may misprice individual stocks but is
correct on the whole, then logic dictates that the target should be included in
, its market-based valuation.
◍ When would a DCF be an inappropriate valuation method?.
Answer: Practically, when you don't have access to financial statements, a
credible DCF analysis valuation is difficult, and a comps analysis might be
more realistic. So if you have a data point such as revenue or EBIT, a comps
analysis is easier to implement.In addition, DCFs may be unfeasible when
the company is not expected to generate positive cash flows for the
foreseeable future. Here, much of the company's value is weighted towards
the distant future, and the DCF becomes less credible.
◍ What is Comparable Company Analysis ("Trading Comps")?.
Answer: Trading comps value a company based on how similar
publicly-traded companies are currently being valued at by the market.
◍ What do transaction comps tell you that trading comps cannot?.
Answer: Transaction comps can provide insights into control premiums that
buyers and sellers should expect when negotiating a transaction.In addition,
transaction comps can validate potential buyers' existence in the private
markets and if a particular investment strategy has been successfully
implemented before.Let's say a certain company is valued at a specific price
based on a DCF analysis and confirmed to be within range by trading
comps. However, if there are no buyers in the market, the seller is unlikely
to exit at its expected valuation.
◍ When calculating enterprise value, why do we add net debt?.
Answer: The underlying idea of net debt is that the cash on a company's
balance sheet could pay down the outstanding debt if needed. For this
reason, cash and cash equivalents are netted against the company's debt, and
many leverage ratios use net debt rather than the gross amount.
◍ How does valuing a private company differ from valuing a public
company?.
Answer: The main difference between valuing a private and public company
is the availability of data. Private companies are not required to make their
financial statements public. If you're provided private company financials,
, the process is similar to public companies, except that private company
financial disclosures are often less complete, standardized, and reliable. In
addition, private companies are less liquid and should thus be valued lower
to reflect an illiquidity discount (usually ranges between ~10-30%).
◍ When should you value a company using a revenue multiple vs. EBITDA?.
Answer: Companies with negative profits and EBITDA will have
meaningless EBITDA multiples. As a result, multiples based on revenue are
the only available option to gain some level of insight.
◍ For forecasting purposes, do you use the effective or marginal tax rate?.
Answer: The choice between whether to use the effective or marginal tax
rate boils down to one specific assumption found in valuation methods such
as the DCF: the tax rate assumption used will be the tax rate paid into
perpetuity. In most cases, the effective tax rate will be lower than the
marginal tax rate, mainly because many companies will defer paying the
government.Hence, line items such as deferred tax assets (DTAs) and
deferred tax liabilities (DTLs) are created. If you use the effective tax rate,
you implicitly assume this deferral of taxes to be a recurring line item
forever. But this would be inaccurate since DTAs and DTLs unwind, and
the balance eventually becomes zero.The recommended approach is to look
at the historical periods (i.e., past 3-5 years) and base your near-term tax rate
assumptions on the effective tax rate. But by the time the 2nd stage of the
DCF is approaching, the tax rate should be "normalized" and be within close
range of the marginal tax rate.
◍ What is the difference between CAGR and IRR?.
Answer: The compound annual growth rate (CAGR) and internal rate of
return (IRR) are both used to measure the return on an investment.
However, the calculation of CAGR involves only three inputs: the
investment's beginning and ending value and the number of years. IRR, or
the XIRR in Excel to be more specific, can handle more complex situations
with the timing of the cash inflows and outflows (i.e., the volatility of the
multiple cash flows) accounted for, rather than just smoothing out the
TEST 2026 QUESTIONS WITH
CORRECT ANSWERS GRADED A+
◍ A company with $100 million in net income and a P/E multiple of 15x is
considering raising $200 million in debt to pay out a one-time cash
dividend. How would you decide if this is a good idea?.
Answer: If we assume that the P/E multiple stays the same after the dividend
and a cost of debt of 5%, the impact to shareholders is as follows:- Net
income drops from $100 million to $90 million [($200 million new
borrowing x 5%) = $10 million]- Equity value drops from $1,500 million
(15 x $100 million) to $1,350 million (15.0 x $90 million)Although there's a
tax impact since interest is mostly deductible, it can be ignored for
interviewing purposes. That's a $150 million drop in equity value. However,
shareholders are immediately getting $200 million.So ignoring any tax
impact, there's a net benefit of $50 million ($200 million - $150 million) to
shareholders.The assumptions we made about taxes, the cost of debt and the
multiple staying the same all affect the result. If any of those variables were
different - for example, if the cost of debt was higher - the equity value
might be wiped out in light of this move. A key assumption in getting the
answer here was that P/E ratios would remain the same at 15x. A company's
P/E multiple is a function of its growth prospects, ROE, and cost of equity.
Hence, borrowing more with no compensatory increase in investment or
growth raises the cost of equity via a higher beta, which will pressure the
P/E multiple down.While it appears based on our assumptions that this is a
decent idea, it could easily be a bad idea given a different set of
assumptions. It's possible that borrowing for the sake of issuing dividends is
unsustainable indefinitely because eventually, debt levels will rise to a point
where the cost of capital and P/E ratios are adversely affected. Broadly, debt
, should support investments and activities that will lead to firm and
shareholder value creation rather than extract cash from the business.
◍ Why do we add minority interest to equity value in the calculation of
enterprise value?.
Answer: Minority interest represents the portion of a subsidiary in which the
parent company doesn't own. Under US GAAP, if a company has ownership
over 50% of another company but below 100% (called a "minority
interest"or "non-controlling investment"), it must include 100% of the
subsidiary's financials in their financial statements despite not owning
100%.When calculating multiples using EV, the numerator will be the
consolidated metric, thus minority interest must be added to enterprise value
for the multiple to be compatible (i.e., no mismatch between the numerator
and denominator).
◍ How would you handle restricted stock in the share count?.
Answer: Some finance professionals completely ignore restricted stock from
the diluted share count because they're unvested. However, increasingly,
unvested restricted stock is included in the diluted share count under the
logic that eventually they'll vest, and it's thus more conservative to count
them.
◍ What is the argument against using the exit multiple approach in a DCF?.
Answer: In theory, a DCF is an intrinsic, cash-flow based valuation method
independent of the market. By using the exit multiple approach, relative
valuation is being brought into the valuation. However, the exit multiple
approach is widely used in practice due to being easier to discuss and defend
in terms of justifying the assumptions used.
◍ Should the target company being valued be included in its peer group?.
Answer: Many professionals exclude the target company being valued from
the peer group because the target's inclusion would skew the multiple
towards the target's current valuation. However, if the intuition behind a
comps analysis is that the market may misprice individual stocks but is
correct on the whole, then logic dictates that the target should be included in
, its market-based valuation.
◍ When would a DCF be an inappropriate valuation method?.
Answer: Practically, when you don't have access to financial statements, a
credible DCF analysis valuation is difficult, and a comps analysis might be
more realistic. So if you have a data point such as revenue or EBIT, a comps
analysis is easier to implement.In addition, DCFs may be unfeasible when
the company is not expected to generate positive cash flows for the
foreseeable future. Here, much of the company's value is weighted towards
the distant future, and the DCF becomes less credible.
◍ What is Comparable Company Analysis ("Trading Comps")?.
Answer: Trading comps value a company based on how similar
publicly-traded companies are currently being valued at by the market.
◍ What do transaction comps tell you that trading comps cannot?.
Answer: Transaction comps can provide insights into control premiums that
buyers and sellers should expect when negotiating a transaction.In addition,
transaction comps can validate potential buyers' existence in the private
markets and if a particular investment strategy has been successfully
implemented before.Let's say a certain company is valued at a specific price
based on a DCF analysis and confirmed to be within range by trading
comps. However, if there are no buyers in the market, the seller is unlikely
to exit at its expected valuation.
◍ When calculating enterprise value, why do we add net debt?.
Answer: The underlying idea of net debt is that the cash on a company's
balance sheet could pay down the outstanding debt if needed. For this
reason, cash and cash equivalents are netted against the company's debt, and
many leverage ratios use net debt rather than the gross amount.
◍ How does valuing a private company differ from valuing a public
company?.
Answer: The main difference between valuing a private and public company
is the availability of data. Private companies are not required to make their
financial statements public. If you're provided private company financials,
, the process is similar to public companies, except that private company
financial disclosures are often less complete, standardized, and reliable. In
addition, private companies are less liquid and should thus be valued lower
to reflect an illiquidity discount (usually ranges between ~10-30%).
◍ When should you value a company using a revenue multiple vs. EBITDA?.
Answer: Companies with negative profits and EBITDA will have
meaningless EBITDA multiples. As a result, multiples based on revenue are
the only available option to gain some level of insight.
◍ For forecasting purposes, do you use the effective or marginal tax rate?.
Answer: The choice between whether to use the effective or marginal tax
rate boils down to one specific assumption found in valuation methods such
as the DCF: the tax rate assumption used will be the tax rate paid into
perpetuity. In most cases, the effective tax rate will be lower than the
marginal tax rate, mainly because many companies will defer paying the
government.Hence, line items such as deferred tax assets (DTAs) and
deferred tax liabilities (DTLs) are created. If you use the effective tax rate,
you implicitly assume this deferral of taxes to be a recurring line item
forever. But this would be inaccurate since DTAs and DTLs unwind, and
the balance eventually becomes zero.The recommended approach is to look
at the historical periods (i.e., past 3-5 years) and base your near-term tax rate
assumptions on the effective tax rate. But by the time the 2nd stage of the
DCF is approaching, the tax rate should be "normalized" and be within close
range of the marginal tax rate.
◍ What is the difference between CAGR and IRR?.
Answer: The compound annual growth rate (CAGR) and internal rate of
return (IRR) are both used to measure the return on an investment.
However, the calculation of CAGR involves only three inputs: the
investment's beginning and ending value and the number of years. IRR, or
the XIRR in Excel to be more specific, can handle more complex situations
with the timing of the cash inflows and outflows (i.e., the volatility of the
multiple cash flows) accounted for, rather than just smoothing out the
