Wall street Prep Valuation Questions
(Latest Updates) Questions
and Answers {Grade A} 100% Correct
(Verified Answers)
What is enterprise value and how do you calculate it? - correct answer Conceptually,
enterprise 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
,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
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
,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.
What is the difference between enterprise value and equity value? - correct answer
Enterprise 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:
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).
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.
(Latest Updates) Questions
and Answers {Grade A} 100% Correct
(Verified Answers)
What is enterprise value and how do you calculate it? - correct answer Conceptually,
enterprise 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
,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
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
,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.
What is the difference between enterprise value and equity value? - correct answer
Enterprise 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:
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).
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.
