Wallstreet Prep Valuation Questions

Could you explain the concept of present value and how it relates to company valuations? - Answer- 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 reason being money currently in possession has the potential to earn interest by being invested today. For intrinsic valuation methods, the value of a company will be equal to the sum of thepresent value of all the future cash flows it generates. Therefore, a company with a high valuation would imply it receives high returns on its invested capital by investing in positive net present value ("NPV") projects consistently while having low risk associated with its cash flows. What is equity value and how is it calculated? - Answer- Often used interchangeably with the term market capitalization ("market cap"), equity value represents a company's value to its equity shareholders. A company's equity value is calculated by multiplying its latest closing share price by its total diluted shares outstanding, as shown below: Equity Value = Latest Closing Share Price × Total Diluted Shares Outstanding How do you calculate the fully diluted number of shares outstanding? - Answer- The treasury stock method ("TSM") is used to calculate the fully diluted number of shares outstanding based on the options, warrants, and other dilutive securities that are currently "in-the-money" (i.e., profitable to exercise). The TSM involves summing up the number of in-the-money ("ITM") options and warrants and then adding that figure to the number of basic shares outstanding. In the proceeding step, the TSM assumes the proceeds from exercising those dilutive options will go towards repurchasing stock at the current share price to reduce the net dilutive impact. What is enterprise value and how do you calculate it? - Answer- Conceptually, enterprise value ("EV") represents the value of the operations of a company to all stakeholders including common shareholders, preferred shareholders, and debt lenders. Thus, enterprise value is considered capital structure neutral, unlike equity value, which is affected by financing decisions. 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 Interest How do you calculate equity value from enterprise value? - Answer- To get to equity value from enterprise value, you would first subtract net debt, where net debt equals the company's gross debt and debt-like claims (e.g., preferred stock), net of cash, and non-operating assets.