TRADING COMPS MODELING EXAM WALL STREET
QUESTIONS AND CORRECT ANSWERS
GRADED A+ | LATEST UPDATE
Q1.
What does equity value represent?
A. Value available to all capital providers
B. Value of shareholders’ stake in the company
C. Book value of equity
D. Value of debt plus equity
Answer: B
Rationale: Equity value = value of shareholders’ claim (market cap). Enterprise
value includes both debt and equity holders.
Q2.
Which is the correct formula for Enterprise Value (EV)?
A. Equity Value + Debt – Cash
B. Equity Value + Cash – Debt
C. Equity Value – Debt – Cash
D. Equity Value + Retained Earnings
Answer: A
Rationale: EV = Equity Value + Net Debt (Debt – Cash) + other claims (minority
interest, preferred).
Q3.
Why is cash subtracted in the EV formula?
A. Cash reduces net income
B. Cash is a non-operating asset and lowers acquisition cost
C. Cash inflates working capital
D. Cash is taxed differently
,Answer: B
Rationale: A buyer can use target’s cash to pay down debt, reducing effective
acquisition price.
Q4.
A company has a market cap of $500M, debt of $200M, and cash of $50M. What
is EV?
A. $650M
B. $700M
C. $750M
D. $800M
Answer: A
Rationale: EV = $500 + $200 – $50 = $650M.
Q5.
Which of the following is added to Enterprise Value?
A. Excess cash
B. Minority interest
C. Accounts receivable
D. Prepaid expenses
Answer: B
Rationale: Minority interest must be added because consolidated financials
include 100% of subsidiary earnings.
Q6.
What is the purpose of the Treasury Stock Method (TSM)?
A. To calculate diluted shares outstanding from options/warrants
,B. To calculate book equity
C. To forecast dividends
D. To adjust working capital
Answer: A
Rationale: TSM estimates the net dilution from in-the-money options/warrants
assuming proceeds are used to repurchase shares.
Q7.
Company has 10M shares outstanding and 1M options with strike price $10.
Current stock price = $20. Proceeds from exercise = $10M. Repurchase = 0.5M
shares. Diluted shares?
A. 10M
B. 10.5M
C. 11M
D. 11.5M
Answer: B
Rationale: 1M exercised – 0.5M repurchased = +0.5M. FD shares = 10M + 0.5M
= 10.5M.
Q8.
Why exclude out-of-the-money options from TSM?
A. They inflate net income
B. They reduce cash
C. They would not be exercised
D. They increase EV
Answer: C
Rationale: Out-of-the-money securities don’t dilute since holders won’t exercise
below strike price.
, Multiples (EV/EBITDA, P/E, etc.)
Q9.
Why use EV/EBITDA instead of P/E?
A. Easier to calculate
B. Neutral to capital structure and tax
C. Always higher
D. Reflects dividends
Answer: B
Rationale: EV/EBITDA neutralizes leverage and tax differences, making peer
comparison more consistent.
Q10.
A company has EV = $1,000M and EBITDA = $200M. What’s EV/EBITDA?
A. 2x
B. 4x
C. 5x
D. 10x
Answer: C
Rationale: $1,000 ÷ $200 = 5.0x.
Q11.
Which multiple is equity-based?
A. EV/EBITDA
B. EV/EBIT
C. EV/Sales
D. P/E
Answer: D
Rationale: P/E is equity-based (price per share ÷ earnings per share).
QUESTIONS AND CORRECT ANSWERS
GRADED A+ | LATEST UPDATE
Q1.
What does equity value represent?
A. Value available to all capital providers
B. Value of shareholders’ stake in the company
C. Book value of equity
D. Value of debt plus equity
Answer: B
Rationale: Equity value = value of shareholders’ claim (market cap). Enterprise
value includes both debt and equity holders.
Q2.
Which is the correct formula for Enterprise Value (EV)?
A. Equity Value + Debt – Cash
B. Equity Value + Cash – Debt
C. Equity Value – Debt – Cash
D. Equity Value + Retained Earnings
Answer: A
Rationale: EV = Equity Value + Net Debt (Debt – Cash) + other claims (minority
interest, preferred).
Q3.
Why is cash subtracted in the EV formula?
A. Cash reduces net income
B. Cash is a non-operating asset and lowers acquisition cost
C. Cash inflates working capital
D. Cash is taxed differently
,Answer: B
Rationale: A buyer can use target’s cash to pay down debt, reducing effective
acquisition price.
Q4.
A company has a market cap of $500M, debt of $200M, and cash of $50M. What
is EV?
A. $650M
B. $700M
C. $750M
D. $800M
Answer: A
Rationale: EV = $500 + $200 – $50 = $650M.
Q5.
Which of the following is added to Enterprise Value?
A. Excess cash
B. Minority interest
C. Accounts receivable
D. Prepaid expenses
Answer: B
Rationale: Minority interest must be added because consolidated financials
include 100% of subsidiary earnings.
Q6.
What is the purpose of the Treasury Stock Method (TSM)?
A. To calculate diluted shares outstanding from options/warrants
,B. To calculate book equity
C. To forecast dividends
D. To adjust working capital
Answer: A
Rationale: TSM estimates the net dilution from in-the-money options/warrants
assuming proceeds are used to repurchase shares.
Q7.
Company has 10M shares outstanding and 1M options with strike price $10.
Current stock price = $20. Proceeds from exercise = $10M. Repurchase = 0.5M
shares. Diluted shares?
A. 10M
B. 10.5M
C. 11M
D. 11.5M
Answer: B
Rationale: 1M exercised – 0.5M repurchased = +0.5M. FD shares = 10M + 0.5M
= 10.5M.
Q8.
Why exclude out-of-the-money options from TSM?
A. They inflate net income
B. They reduce cash
C. They would not be exercised
D. They increase EV
Answer: C
Rationale: Out-of-the-money securities don’t dilute since holders won’t exercise
below strike price.
, Multiples (EV/EBITDA, P/E, etc.)
Q9.
Why use EV/EBITDA instead of P/E?
A. Easier to calculate
B. Neutral to capital structure and tax
C. Always higher
D. Reflects dividends
Answer: B
Rationale: EV/EBITDA neutralizes leverage and tax differences, making peer
comparison more consistent.
Q10.
A company has EV = $1,000M and EBITDA = $200M. What’s EV/EBITDA?
A. 2x
B. 4x
C. 5x
D. 10x
Answer: C
Rationale: $1,000 ÷ $200 = 5.0x.
Q11.
Which multiple is equity-based?
A. EV/EBITDA
B. EV/EBIT
C. EV/Sales
D. P/E
Answer: D
Rationale: P/E is equity-based (price per share ÷ earnings per share).
