WALLSTREET PREP VALUATION QUESTIONS WITH ALL ANSWERS

WallstreetPrepValuationQuestions m m m




WithAllAnswers m m m




1. Couldbyoubexplainbthebconceptbofbpresentbvaluebandbhowbitbrelatesbto
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bcompa- bnybvaluations?:bThebpresentbvaluebconceptbisbbasedbonbthebpremisebthat
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b"abdollarbin bthebpresentbisbworthbmorebthanbabdollarbinbthebfuture"bduebtobthebtime
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bvaluebofbmoney. bThe breason bbeing bmoney bcurrently bin bpossession bhas bthe
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bpotential bto bearn binterest bby bbeing binvested btoday.
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For bintrinsic bvaluation bmethods, bthe bvalue bof ba bcompany bwill bbe bequal bto bthe
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bsum bof bthepresent bvalue bof ball bthe bfuture bcash bflows bit bgenerates.bTherefore, ba
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bcompany bwith ba bhigh bvaluation bwould bimply bit breceives bhigh breturns bon bits
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binvested bcapital bby
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investingbinbpositivebnetbpresentbvalueb("NPV")bprojectsbconsistentlybwhilebhavingblow
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brisk bassociated bwith bits bcash bflows.
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2. What bis bequity bvalue band bhow bis bit bcalculated?:bOften bused
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binterchangeably bwith bthe bterm bmarket bcapitalization b("market bcap"), bequity bvalue
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brepresents ba bcom- bpany's bvalue bto bits bequity bshareholders.bA bcompany's bequity
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bvalue bis bcalculated bby bmultiplying bits blatest bclosing bshare bprice bby bits btotal
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bdiluted bshares boutstanding, bas bshown bbelow:
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EquitybValue b= bLatest bClosing bShare bPrice b×bTotal bDiluted bShares bOutstanding
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3. How bdo byoubcalculate bthe bfully bdiluted bnumber bof bshares boutstanding?:
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bThe btreasurybstockbmethodb("TSM")bisbusedbtobcalculatebthebfullybdilutedbnumberbof
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bshares boutstanding bbased bon bthe boptions, bwarrants, band bother bdilutive bsecurities
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bthat bare bcurrently b"in-the-money" b(i.e., bprofitable bto bexercise).
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ThebTSM binvolves bsumming bup bthe bnumber bof bin-the-money b("ITM") boptions band
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bwarrants band bthen badding bthat bfigure bto bthe bnumber bof bbasic bshares
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boutstanding. bIn bthe bproceeding bstep, bthe bTSM bassumes bthe bproceeds bfrom
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1 b/ b m m




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,mexercising bthose bdilutive boptions bwill bgo btowards brepurchasing bstock bat bthe
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bcurrent bshare bprice bto breduce bthe bnet bdilutive bimpact.
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4. What bis benterprise bvalue band bhow bdo byou bcalculate bit?:bConceptually,
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ben- bterprise bvalue b("EV") brepresents bthe bvalue bof bthe boperations bof ba
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bcompany bto ball bstakeholders bincluding bcommon bshareholders, bpreferred
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bshareholders, band bdebt blenders.
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Thus, benterprise bvalue bis bconsidered bcapital bstructure bneutral, bunlike bequity bvalue,
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bwhich bis baffected bby bfinancing bdecisions.
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Enterprise bvalue bis bcalculated bby btaking bthe bcompany's bequity bvalue band badding
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bnet bdebt, bpreferred bstock, band bminority binterest.
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EnterprisebValue b= bEquitybValue b+ bNet bDebt b+ bPreferred bStock b+ bMinority bInterest
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5. How bdo byou bcalculate bequity bvalue bfrom benterprise bvalue?: bTo bget bto
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bequity bvaluebfrombenterprisebvalue,byoubwouldbfirstbsubtractbnetbdebt,bwherebnet
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bdebtbequals bthe bcompany's bgross bdebt band bdebt-like bclaims b(e.g., bpreferred
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bstock), bnet bof bcash,
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2 b/ b m m




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,and bnon-operating bassets.
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EquitybValue b= bEnterprisebValue b- bNet bDebt b- bPreferred bStock b- bMinority bInterest
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6. Whichblinebitemsbarebincludedbinbthebcalculationbofbnetbdebt?:bThe m m m m m m m m m m m




bcalculation bof bnet bdebt baccounts bfor ball binterest-bearing bdebt, bsuch bas bshort-term
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band blong- bterm bloans band bbonds, bas bwell bas bnon-equity bfinancial bclaims bsuch bas
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bpreferred bstock band bnon- bcontrolling binterests. bFrom bthis bgross bdebt bamount,
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bcash band bother bnon-operating bassets bsuch bas bshort-term binvestments band bequity
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binvestments bare bsubtracted bto barrive bat bnet bdebt.
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Net bDebt b=bTotal bDebt b- bCash b& bEquivalents
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7. Whenbcalculatingbenterprisebvalue,bwhybdobwebaddbnetbdebt?:bThe m m m m m m m m m m




bunderlying bidea bof bnet bdebt bis bthat bthe bcash bon ba bcompany's bbalance bsheet bcould
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bpay bdown bthe boutstanding bdebt bif bneeded.bFor bthis breason, bcash band bcash
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bequivalents bare bnetted bagainst bthe bcompany's bdebt, band bmany bleverage bratios
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buse bnet bdebt brather bthan bthe bgross bamount.
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8. What bis bthe bdifference bbetween benterprise bvalue band bequity bvalue?:
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bEnter- bprisebvaluebrepresentsballbstakeholdersbinbabbusiness,bincludingbequity
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bshareholders, bdebt blenders, band bpreferred bstock bowners.bTherefore, bit's
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bindependent bof bthe bcapital bstructure.bIn baddition, benterprise bvalue bis bcloser bto bthe
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bactual bvalue bof bthe bbusiness bsince bit baccounts bfor ball bownership bstakes b(as
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bopposed bto bjust bequity bowners).
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To btie bthis bto ba brecent bexample, bmany binvestors bwere bastonished bthat bZoom, ba
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bvideo bconferencing bplatform, bhad ba bhigher bmarket bcapitalization bthan bseven bof
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bthe blargest bairlines bcombined bat bone bpoint.bThe bpoints bbeing bneglected bwere:
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1. The bequity bvalues bof bthe bairline bcompanies bwere btemporarily bdeflated bgiven
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bthe btravel brestrictions, band bthe bgovernment bbailout bhad bnot byet bbeen
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bannounced.
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2. Thebairlinesbarebsignificantlybmorebmaturebandbhavebfarbmorebdebtbonbtheirbbalance
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bsheet b(i.e., bmore bnon- bequity bstakeholders).
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9. Could ba bcompany bhave ba bnegative bnet bdebt bbalance band bhave ban m m m m m m m m m m m




benterprise bvalue blower bthan bits bequity bvalue?: bYes, bnegative bnet bdebt bjust
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bmeans bthat ba bcompany bhas bmore bcash bthan bdebt. bFor bexample, bboth bApple band
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bMicrosoft bhave bmassive bnegative bnet bdebt bbalances bbecause bthey bhoard bcash.
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bIn bthese bcases, bcompanies bwill bhave benterprise bvalues blower bthan btheir bequity
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bvalue.
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If bit bseems bcounter-intuitive bthat benterprise bvalue bcan bbe blower bthan bequity
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bvalue, bremember bthat benterprise bvalue brepresents bthe bvalue bof ba bcompany's
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3 b/ b
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, mb operations, bwhich bexcludes bany bnon-operating bassets.bWhen byou bthink babout bit
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m bthis bway, bit
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4 b/ b
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