Wallstreet Prep Valuation Questions With Verified Solutions

Wallstreet Prep Valuation Questions With Verified Solutions Could you explain the concept of present value and how it relates to company valuations? 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 the present 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? 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 Brainpower Read More Previous Play Next Rewind 10 seconds Move forward 10 seconds Unmute 0:00 / 0:00 Full screen How do you calculate the fully diluted number of shares outstanding?