Financial Analyst Exam Questions with Correct Answers (Latest 2023)

What's the formula for Enterprise Value? Correct Answer EV = Equity Value + Debt + Preferred Stock + Minority Interest - Cash How do you calculate fully diluted shares? Correct Answer Take the basic share count and add in the dilutive effect of stock options and any other dilutive securities, such as warrants, convertible debt or convertible preferred stock. Why do you subtract cash in the formula for Enterprise Value? Is that always accurate? Correct Answer Cash is subtracted because it's considered a non-operating asset and because Equity Value implicitly accounts for it. It's not always accurate because technically you should be subtracting only excess cash - the amount of cash a company has above the minimum cash it requires to operate. Could a company have a negative Enterprise Value? What would that mean? Correct Answer Yes. It means that the company has an extremely large cash balance, or an extremely low market capitalization (or both). You see it with: 1. Companies on the brink of bankruptcy. 2. Financial institutions, such as banks, that have large cash balances. What's the difference between Equity Value and Shareholders' Equity? Correct Answer Equity Value is the market value and Shareholders' Equity is the book value. Equity Value can never be negative because shares outstanding and share prices can never be negative, whereas Shareholders' Equity could be any value. For healthy companies, Equity Value usually far exceeds Shareholders' Equity. Are there any problems with the Enterprise Value formula you just gave me? Correct Answer Yes - it's too simple. There are lots of other things you need to add into the formula with real companies: • Net Operating Losses - Should be valued and arguably added in, similar to cash. • Long-Term Investments - These should be counted, similar to cash. • Equity Investments - Any investments in other companies should also be added in, similar to cash (though they might be discounted). • Capital Leases - Like debt, these have interest payments - so they should be added in like debt. • (Some) Operating Leases - Sometimes you need to convert operating leases to capital leases and add them as well. • Pension Obligations - Sometimes these are counted as debt as well. So a more "correct" formula would be Enterprise Value = Equity Value - Cash + Debt + Preferred Stock + Minority Interest - NOLs - Investments + Capital Leases + Pension Obligations...