Wallstreet Prep Valuation Exam
Questions and Answers
1. Could you explain the concept of present value and how it
relates to compa- ny 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 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.
2. What is equity value and how is it calculated?: Often used
interchangeably with the term market capitalization ("market
cap"), equity value represents a com- pany'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
3. How do you calculate the fully diluted number of shares
outstanding?: 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.
4. What is enterprise value and how do you calculate it?:
Conceptually, en- terprise 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
5. How do you calculate equity value from enterprise value?:
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.
Equity Value = Enterprise Value - Net Debt - Preferred Stock -
Minority Interest
6. Which line items are included in the calculation of net
debt?: The calculation of net debt accounts for all interest-bearing
debt, such as short-term and long-
term loans and bonds, as well as non-equity financial claims such
as preferred stock and non- controlling interests. From this gross
debt amount, cash and other non-operating assets such as short-
term investments and equity investments are subtracted to arrive
at net debt.
Net Debt = Total Debt - Cash & Equivalents
7. When calculating enterprise value, why do we add net
debt?: 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.
8. What is the difference between enterprise value and equity
value?: Enter- prise value represents all stakeholders in a
business, including equity shareholders, debt lenders, and
Questions and Answers
1. Could you explain the concept of present value and how it
relates to compa- ny 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 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.
2. What is equity value and how is it calculated?: Often used
interchangeably with the term market capitalization ("market
cap"), equity value represents a com- pany'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
3. How do you calculate the fully diluted number of shares
outstanding?: 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.
4. What is enterprise value and how do you calculate it?:
Conceptually, en- terprise 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
5. How do you calculate equity value from enterprise value?:
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.
Equity Value = Enterprise Value - Net Debt - Preferred Stock -
Minority Interest
6. Which line items are included in the calculation of net
debt?: The calculation of net debt accounts for all interest-bearing
debt, such as short-term and long-
term loans and bonds, as well as non-equity financial claims such
as preferred stock and non- controlling interests. From this gross
debt amount, cash and other non-operating assets such as short-
term investments and equity investments are subtracted to arrive
at net debt.
Net Debt = Total Debt - Cash & Equivalents
7. When calculating enterprise value, why do we add net
debt?: 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.
8. What is the difference between enterprise value and equity
value?: Enter- prise value represents all stakeholders in a
business, including equity shareholders, debt lenders, and
