WALLSTREET PREP VALUATION
EXAM QUESTIONS AND CORRECT
ANSWERS 2025/2026 GRADED A+ .
,1. Could you explain the concept of present value and how it relates to compa- ny valuations? CORRECT
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.
2. What is equity value and how is it calculated? CORRECT ANSWER 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 CORRECT ANSWER
Equity Value = Latest Closing Share Price × Total Diluted Shares Outstanding
3. How do you calculate the fully diluted number of shares outstanding? CORRECT 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.
4. What is enterprise value and how do you calculate it? CORRECT ANSWER 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? CORRECT 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.
Equity Value = Enterprise Value - Net Debt - Preferred Stock - Minority Interest
6. Which line items are included in the calculation of net debt? CORRECT ANSWER 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? CORRECT ANSWER 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? CORRECT ANSWER Enter- prise value
represents all stakeholders in a business, including equity shareholders, debt lenders, and preferred stock owners.
Therefore, it's independent of the capital structure. In addition, enterprise value is closer to the actual value of the
business since it accounts for all ownership stakes (as opposed to just equity owners).
To tie this to a recent example, many investors were astonished that Zoom, a video conferencing platform, had a higher
market capitalization than seven of the largest airlines combined at one point. The points being neglected were
CORRECT ANSWER
1. The equity values of the airline companies were temporarily deflated given the travel restrictions, and the
government bailout had not yet been announced.
2. The airlines are significantly more mature and have far more debt on their balance sheet (i.e., more non- equity
stakeholders).
9. Could a company have a negative net debt balance and have an enterprise value lower than its equity value?
CORRECT ANSWER Yes, negative net debt just means that a company has more cash than debt. For example, both
Apple and Microsoft have massive negative net debt balances because they hoard cash. In these cases, companies will
have enterprise values lower than their equity 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-operating assets. When you think about it this
, way, it
should come as no surprise that companies with much cash (which is treated as a non-operating asset) will have a
higher equity value than enterprise value.
10. Can the enterprise value of a company turn negative? CORRECT ANSWER While negative en- terprise
values are a rare occurrence, it does happen from time to time. A negative enterprise value means a company has a net
cash balance (total cash less total debt) that exceeds its equity value.
11. If a company raises $250 million in additional debt, how would its enter- prise value change? CORRECT
ANSWER Theoretically, there should be no impact as enterprise value is capital structure neutral. The new debt raised
shouldn't impact the enterprise value, as the cash and debt balance would increase and offset the other entry. However,
the cost of financing (i.e., through financing fees and interest expense) could negatively impact the company's
profitability and lead to a lower valuation from the higher cost of debt.
12. Why do we add minority interest to equity value in the calculation of enterprise value? CORRECT
ANSWER Minority interest represents the portion of a subsidiary in which the parent company doesn't own. Under US
GAAP, if a company has ownership over 50% of another company but below 100% (called a "minority interest"
or "non-controlling investment"), it must include 100% of the subsidiary's financials in their financial statements despite
not owning 100%.
When calculating multiples using EV, the numerator will be the consolidated metric, thus minority interest must be added
to enterprise value for the multiple to be compatible (i.e., no mismatch between the numerator and denominator).
13. How are convertible bonds and preferred equity with a convertible feature accounted for when calculating
enterprise value? CORRECT ANSWER If the convertible bonds and the preferred equities are "in-the-money" as of
thevaluation date (i.e., the current stock price is greater than their strike price), then the treatment will be the same as
additional dilution from equity. However, if they're "out-of-the-money," they would be treated as a financial liability
(similar to debt).
14. What are the two main approaches to valuation? CORRECT ANSWER Intrinsic Valuation CORRECT
ANSWER For an intrinsic valuation, the value of a business is arrived at by looking at the business's ability to generate
cash flows. The discounted cash flow method is the most common type of intrinsic valuation and is based on the notion that
a business's value equals the present value of its future free cash flows.
Relative Valuation CORRECT ANSWER In relative valuation, a business's value is arrived at by looking at comparable
companies and applying the average or median multiples derived from the peer group - often EV/EBITDA, P/E, or some
other relevant multiple to value the target. This valuation can be done by looking at the multiples of comparable public
companies using their current market values, which is called "trading comps," or by
EXAM QUESTIONS AND CORRECT
ANSWERS 2025/2026 GRADED A+ .
,1. Could you explain the concept of present value and how it relates to compa- ny valuations? CORRECT
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.
2. What is equity value and how is it calculated? CORRECT ANSWER 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 CORRECT ANSWER
Equity Value = Latest Closing Share Price × Total Diluted Shares Outstanding
3. How do you calculate the fully diluted number of shares outstanding? CORRECT 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.
4. What is enterprise value and how do you calculate it? CORRECT ANSWER 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? CORRECT 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.
Equity Value = Enterprise Value - Net Debt - Preferred Stock - Minority Interest
6. Which line items are included in the calculation of net debt? CORRECT ANSWER 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? CORRECT ANSWER 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? CORRECT ANSWER Enter- prise value
represents all stakeholders in a business, including equity shareholders, debt lenders, and preferred stock owners.
Therefore, it's independent of the capital structure. In addition, enterprise value is closer to the actual value of the
business since it accounts for all ownership stakes (as opposed to just equity owners).
To tie this to a recent example, many investors were astonished that Zoom, a video conferencing platform, had a higher
market capitalization than seven of the largest airlines combined at one point. The points being neglected were
CORRECT ANSWER
1. The equity values of the airline companies were temporarily deflated given the travel restrictions, and the
government bailout had not yet been announced.
2. The airlines are significantly more mature and have far more debt on their balance sheet (i.e., more non- equity
stakeholders).
9. Could a company have a negative net debt balance and have an enterprise value lower than its equity value?
CORRECT ANSWER Yes, negative net debt just means that a company has more cash than debt. For example, both
Apple and Microsoft have massive negative net debt balances because they hoard cash. In these cases, companies will
have enterprise values lower than their equity 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-operating assets. When you think about it this
, way, it
should come as no surprise that companies with much cash (which is treated as a non-operating asset) will have a
higher equity value than enterprise value.
10. Can the enterprise value of a company turn negative? CORRECT ANSWER While negative en- terprise
values are a rare occurrence, it does happen from time to time. A negative enterprise value means a company has a net
cash balance (total cash less total debt) that exceeds its equity value.
11. If a company raises $250 million in additional debt, how would its enter- prise value change? CORRECT
ANSWER Theoretically, there should be no impact as enterprise value is capital structure neutral. The new debt raised
shouldn't impact the enterprise value, as the cash and debt balance would increase and offset the other entry. However,
the cost of financing (i.e., through financing fees and interest expense) could negatively impact the company's
profitability and lead to a lower valuation from the higher cost of debt.
12. Why do we add minority interest to equity value in the calculation of enterprise value? CORRECT
ANSWER Minority interest represents the portion of a subsidiary in which the parent company doesn't own. Under US
GAAP, if a company has ownership over 50% of another company but below 100% (called a "minority interest"
or "non-controlling investment"), it must include 100% of the subsidiary's financials in their financial statements despite
not owning 100%.
When calculating multiples using EV, the numerator will be the consolidated metric, thus minority interest must be added
to enterprise value for the multiple to be compatible (i.e., no mismatch between the numerator and denominator).
13. How are convertible bonds and preferred equity with a convertible feature accounted for when calculating
enterprise value? CORRECT ANSWER If the convertible bonds and the preferred equities are "in-the-money" as of
thevaluation date (i.e., the current stock price is greater than their strike price), then the treatment will be the same as
additional dilution from equity. However, if they're "out-of-the-money," they would be treated as a financial liability
(similar to debt).
14. What are the two main approaches to valuation? CORRECT ANSWER Intrinsic Valuation CORRECT
ANSWER For an intrinsic valuation, the value of a business is arrived at by looking at the business's ability to generate
cash flows. The discounted cash flow method is the most common type of intrinsic valuation and is based on the notion that
a business's value equals the present value of its future free cash flows.
Relative Valuation CORRECT ANSWER In relative valuation, a business's value is arrived at by looking at comparable
companies and applying the average or median multiples derived from the peer group - often EV/EBITDA, P/E, or some
other relevant multiple to value the target. This valuation can be done by looking at the multiples of comparable public
companies using their current market values, which is called "trading comps," or by
