Wall Street Prep Redbook Valuation Questions: Corporate Finance Theo
Study online at https://quizlet.com/_d3l9m9
1. Could you ex- The present value concept is based on the premise that "a dollar in the present is
plain the concept worth more than a dollar in the future" due to the time value of money. The reason
of present value being money currently in possession has the potential to earn interest by being
and how it relates invested today.
to company valu-
ations? 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.
2. What is equity Often used interchangeably with the term market capitalization ("market cap"),
value and how is equity value represents a company's value to its equity shareholders. A company's
it calculated? 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 cal- The treasury stock method ("TSM") is used to calculate the fully diluted number of
culate the fully di- shares outstanding based on the options, warrants, and other dilutive securities
luted number of that are currently "in-the-money" (i.e., profitable to exercise).
shares outstand-
ing?
4. What is enter- Conceptually, enterprise value ("EV") represents the value of the operations of a
prise value and company to all stakeholders including common shareholders, preferred share-
how do you calcu- holders, and debt lenders.
late it?
Enterprise Value = Equity Value + Net Debt + Preferred Stock + Minority Interest
5.
1/9
, Wall Street Prep Redbook Valuation Questions: Corporate Finance Theo
Study online at https://quizlet.com/_d3l9m9
How do you cal- To get to equity value from enterprise value, you would first subtract net debt,
culate equity val- where net debt equals the company's gross debt and debt-like claims (e.g.,
ue from enter- preferred stock), net of cash, and non-operating assets.
prise value?
Equity Value = Enterprise Value -Net Debt - Preferred Stock - Minority Interest
6. Which line items The calculation of net debt accounts for all interest-bearing debt, such as
are included in short-term and long-term loans and bonds, as well as non-equity financial claims
the calculation of such as preferred stock and non-controlling interests. From this gross debt
net debt? amount, cash and other non-operating assets, such as short-term and equity
investments, are subtracted to arrive at net debt.
7. When calculating The underlying idea of net debt is that the cash on a company's balance sheet
enterprise value, could pay down the outstanding
why do we add debt if needed. For this reason, cash and cash equivalents are netted against the
net debt? company's debt, and many leverage ratios use net debt rather than the gross
amount.
8. What is the dif- Enterprise value represents all stakeholders in a business, including equity share-
ference between holders, debt lenders, and preferred stock owners. Therefore, it's independent of
enterprise value the capital structure. In addition, enterprise value is closer to the actual value of
and equity value? the business since it accounts for all ownership stakes (as opposed to just equity
owners).
9. Could a compa- Yes, negative net debt just means that a company has more cash than debt. For
ny have a nega- example, both Apple and
tive net debt bal- Microsoft has massive negative net debt balances because they hoard cash. In
ance and have an these cases, companies will
enterprise value have enterprise values lower than their equity value.
lower than its eq-
uity value? ***If it seems counter-intuitive that enterprise value can be lower than equity value,
remember that enterprise
value represents the value of a company's operations, which excludes any non-op-
2/9
Study online at https://quizlet.com/_d3l9m9
1. Could you ex- The present value concept is based on the premise that "a dollar in the present is
plain the concept worth more than a dollar in the future" due to the time value of money. The reason
of present value being money currently in possession has the potential to earn interest by being
and how it relates invested today.
to company valu-
ations? 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.
2. What is equity Often used interchangeably with the term market capitalization ("market cap"),
value and how is equity value represents a company's value to its equity shareholders. A company's
it calculated? 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 cal- The treasury stock method ("TSM") is used to calculate the fully diluted number of
culate the fully di- shares outstanding based on the options, warrants, and other dilutive securities
luted number of that are currently "in-the-money" (i.e., profitable to exercise).
shares outstand-
ing?
4. What is enter- Conceptually, enterprise value ("EV") represents the value of the operations of a
prise value and company to all stakeholders including common shareholders, preferred share-
how do you calcu- holders, and debt lenders.
late it?
Enterprise Value = Equity Value + Net Debt + Preferred Stock + Minority Interest
5.
1/9
, Wall Street Prep Redbook Valuation Questions: Corporate Finance Theo
Study online at https://quizlet.com/_d3l9m9
How do you cal- To get to equity value from enterprise value, you would first subtract net debt,
culate equity val- where net debt equals the company's gross debt and debt-like claims (e.g.,
ue from enter- preferred stock), net of cash, and non-operating assets.
prise value?
Equity Value = Enterprise Value -Net Debt - Preferred Stock - Minority Interest
6. Which line items The calculation of net debt accounts for all interest-bearing debt, such as
are included in short-term and long-term loans and bonds, as well as non-equity financial claims
the calculation of such as preferred stock and non-controlling interests. From this gross debt
net debt? amount, cash and other non-operating assets, such as short-term and equity
investments, are subtracted to arrive at net debt.
7. When calculating The underlying idea of net debt is that the cash on a company's balance sheet
enterprise value, could pay down the outstanding
why do we add debt if needed. For this reason, cash and cash equivalents are netted against the
net debt? company's debt, and many leverage ratios use net debt rather than the gross
amount.
8. What is the dif- Enterprise value represents all stakeholders in a business, including equity share-
ference between holders, debt lenders, and preferred stock owners. Therefore, it's independent of
enterprise value the capital structure. In addition, enterprise value is closer to the actual value of
and equity value? the business since it accounts for all ownership stakes (as opposed to just equity
owners).
9. Could a compa- Yes, negative net debt just means that a company has more cash than debt. For
ny have a nega- example, both Apple and
tive net debt bal- Microsoft has massive negative net debt balances because they hoard cash. In
ance and have an these cases, companies will
enterprise value have enterprise values lower than their equity value.
lower than its eq-
uity value? ***If it seems counter-intuitive that enterprise value can be lower than equity value,
remember that enterprise
value represents the value of a company's operations, which excludes any non-op-
2/9
