Wallstreet Prep Valuation Questions
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1. Could you ex- The present value concept is based on the premise that "a dollar in the present
plain the concept is worth more than a dollar in the future" due to the time value of money. The
of present value reason being money currently in possession has the potential to earn interest by
and how it relates being invested today.
to company valu- For intrinsic valuation methods, the value of a company will be equal to the sum
ations? 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 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- The TSM involves summing up the number of in-the-money ("ITM") options and
ing? 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 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 cal- holders, and debt lenders.
culate it? 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
, Wallstreet Prep Valuation Questions
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net debt, preferred stock, and minority interest.
Enterprise Value = Equity Value + Net Debt + Preferred Stock + Minority Interest
5. 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 investments and
equity investments are subtracted to arrive at net debt.
Net Debt = Total Debt - Cash & Equivalents
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 debt if needed. For this reason, cash and cash
why do we add equivalents are netted against the company's debt, and many leverage ratios use
net debt? net debt rather than the gross amount.
8. What is the differ- Enterprise value represents all stakeholders in a business, including equity share-
ence 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).
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:
1. The equity values of the airline companies were temporarily deflated given the
, Wallstreet Prep Valuation Questions
Study online at https://quizlet.com/_czw462
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 compa- Yes, negative net debt just means that a company has more cash than debt.
ny have a nega- For example, both Apple and Microsoft have massive negative net debt balances
tive net debt bal- because they hoard cash. In these cases, companies will have enterprise values
ance and have an lower than their equity value.
enterprise value If it seems counter-intuitive that enterprise value can be lower than equity value,
lower than its eq- remember that enterprise value represents the value of a company's operations,
uity value? 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 enter- While negative enterprise values are a rare occurrence, it does happen from time
prise value of to time. A negative enterprise value means a company has a net cash balance
a company turn (total cash less total debt) that exceeds its equity value.
negative?
11. If a company rais- Theoretically, there should be no impact as enterprise value is capital structure
es $250 million in neutral. The new debt raised shouldn't impact the enterprise value, as the cash
additional debt, and debt balance would increase and offset the other entry.
how would its However, the cost of financing (i.e., through financing fees and interest expense)
enterprise value could negatively impact the company's profitability and lead to a lower valuation
change? from the higher cost of debt.
12. Why do we add Minority interest represents the portion of a subsidiary in which the parent
minority interest company doesn't own. Under US GAAP, if a company has ownership over 50%
to equity value in of another company but below 100% (called a "minority interest"
the calculation of or "non-controlling investment"), it must include 100% of the subsidiary's finan-
enterprise value? cials in their financial statements despite not owning 100%.
When calculating multiples using EV, the numerator will be the consolidated
, Wallstreet Prep Valuation Questions
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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 convert- If the convertible bonds and the preferred equities are "in-the-money" as of
ible bonds and thevaluation date (i.e., the current stock price is greater than their strike price),
preferred equi- then the treatment will be the same as additional dilution from equity. However,
ty with a con- if they're "out-of-the-money," they would be treated as a financial liability (similar
vertible feature to debt).
accounted for
when calculating
enterprise value?
14. What are the two Intrinsic Valuation: For an intrinsic valuation, the value of a business is arrived at by
main approaches looking at the business's ability to generate cash flows. The discounted cash flow
to valuation? 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: 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 looking at the multiples of comparable companies recently
acquired, which is called "transaction comps."
15. What are the Comparable Company Analysis ("Trading Comps")
most common Comparable Transactions Analysis ("Transaction Comps")
valuation meth- Discounted Cash Flow Analysis ("DCF")
ods used in fi- Leveraged Buyout Analysis ("LBO")
nance? Liquidation Analysis
16. What is Compa- Trading comps value a company based on how similar publicly-traded companies
rable Company are currently being valued at by the market.
Study online at https://quizlet.com/_czw462
1. Could you ex- The present value concept is based on the premise that "a dollar in the present
plain the concept is worth more than a dollar in the future" due to the time value of money. The
of present value reason being money currently in possession has the potential to earn interest by
and how it relates being invested today.
to company valu- For intrinsic valuation methods, the value of a company will be equal to the sum
ations? 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 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- The TSM involves summing up the number of in-the-money ("ITM") options and
ing? 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 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 cal- holders, and debt lenders.
culate it? 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
, Wallstreet Prep Valuation Questions
Study online at https://quizlet.com/_czw462
net debt, preferred stock, and minority interest.
Enterprise Value = Equity Value + Net Debt + Preferred Stock + Minority Interest
5. 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 investments and
equity investments are subtracted to arrive at net debt.
Net Debt = Total Debt - Cash & Equivalents
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 debt if needed. For this reason, cash and cash
why do we add equivalents are netted against the company's debt, and many leverage ratios use
net debt? net debt rather than the gross amount.
8. What is the differ- Enterprise value represents all stakeholders in a business, including equity share-
ence 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).
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:
1. The equity values of the airline companies were temporarily deflated given the
, Wallstreet Prep Valuation Questions
Study online at https://quizlet.com/_czw462
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 compa- Yes, negative net debt just means that a company has more cash than debt.
ny have a nega- For example, both Apple and Microsoft have massive negative net debt balances
tive net debt bal- because they hoard cash. In these cases, companies will have enterprise values
ance and have an lower than their equity value.
enterprise value If it seems counter-intuitive that enterprise value can be lower than equity value,
lower than its eq- remember that enterprise value represents the value of a company's operations,
uity value? 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 enter- While negative enterprise values are a rare occurrence, it does happen from time
prise value of to time. A negative enterprise value means a company has a net cash balance
a company turn (total cash less total debt) that exceeds its equity value.
negative?
11. If a company rais- Theoretically, there should be no impact as enterprise value is capital structure
es $250 million in neutral. The new debt raised shouldn't impact the enterprise value, as the cash
additional debt, and debt balance would increase and offset the other entry.
how would its However, the cost of financing (i.e., through financing fees and interest expense)
enterprise value could negatively impact the company's profitability and lead to a lower valuation
change? from the higher cost of debt.
12. Why do we add Minority interest represents the portion of a subsidiary in which the parent
minority interest company doesn't own. Under US GAAP, if a company has ownership over 50%
to equity value in of another company but below 100% (called a "minority interest"
the calculation of or "non-controlling investment"), it must include 100% of the subsidiary's finan-
enterprise value? cials in their financial statements despite not owning 100%.
When calculating multiples using EV, the numerator will be the consolidated
, Wallstreet Prep Valuation Questions
Study online at https://quizlet.com/_czw462
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 convert- If the convertible bonds and the preferred equities are "in-the-money" as of
ible bonds and thevaluation date (i.e., the current stock price is greater than their strike price),
preferred equi- then the treatment will be the same as additional dilution from equity. However,
ty with a con- if they're "out-of-the-money," they would be treated as a financial liability (similar
vertible feature to debt).
accounted for
when calculating
enterprise value?
14. What are the two Intrinsic Valuation: For an intrinsic valuation, the value of a business is arrived at by
main approaches looking at the business's ability to generate cash flows. The discounted cash flow
to valuation? 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: 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 looking at the multiples of comparable companies recently
acquired, which is called "transaction comps."
15. What are the Comparable Company Analysis ("Trading Comps")
most common Comparable Transactions Analysis ("Transaction Comps")
valuation meth- Discounted Cash Flow Analysis ("DCF")
ods used in fi- Leveraged Buyout Analysis ("LBO")
nance? Liquidation Analysis
16. What is Compa- Trading comps value a company based on how similar publicly-traded companies
rable Company are currently being valued at by the market.
