Breaking Into Wall Street Exam Questions & Answers
(All Technicals) 400 Questions & Answers: A+ Guide
Solution
company value - ANSWERCash Flow / (Discount Rate - Cash Flow Growth Rate)
why do we need the 3 financial statements - ANSWERestimate cash flow so you can
estimate the value of the company
order of line items of income statement - ANSWERrevenue - COGS = Gross Profit -
Operating Expenses = Operating Income +/- Other Income/Expense = Pretax Income
- taxes = net income
income statement - ANSWERtracks revenues and expenses over a specific period;
shows the things that impact taxes
Free Cash Flow - ANSWERcash flow from operations - CapEx
net working capital - ANSWERcurrent assets (excluding cash and investments) -
current liabilities (excluding debt)
change in net working capital - ANSWERold net working capital - new net working
capital
positive change in net working capital - ANSWERfrees up cash
negative change in net working capital - ANSWERuses cash
EBIT - ANSWERearnings before interest and tax; operating income
EBITDA - ANSWEREarnings before interest, taxes, depreciation, and amortization;
operating income + D&A
NOPAT - ANSWERnet operating profit after taxes; operating income*(1- tax rate)
Is EBIT unlevered or levered - ANSWERunlevered
is EBITDA unlevered or levered - ANSWERunlevered
is NOPAT unlevered or levered - ANSWERunlevered
What does DCF stand for? - ANSWERDiscounted Cash Flow Analysis
what kind of valuation is DCF - ANSWERintrinsic
, what is intrinsic valuation - ANSWERvaluing a company based on its cash flows
what is relative valuation - ANSWERlooking at comparable companies that are
similar to the company you are valuing based on size, growth, industry, etc and
determine if the company you're valuing should be at a premium or not based on
the valuation multiples of the comparable companies
what are examples of intrinsic valuation - ANSWERDCF, Leveraged buy out model,
precedent transaction
what is a DCF - ANSWERan intrinsic valuation method that can be broken down into
3 parts: historical and projection period, WACC, and terminal model
first we use historical financial data and we project that data forward to find future
cash flows for the next 5 years
then we calculate WACC which is the weighted average cost of capital to represent
the opportunity cost of investing in the company
the WACC formula is WACC = (%debt)(cost of debt)(1-tax rate) + (%equity)(cost of
equity)
After this, we find the terminal model, which can be found using the Gordon Growth
Rate or Terminal multiple (EV/EBITDA)
Then we will discount the terminal value using the same WACC to find the present
value of the terminal value and add this to the present value of the projected cash
flows to get the enterprise value
then you use the enterprise value to find the equity value
enterprise value formula - ANSWEREnterprise value = equity value + debt + preferred
stock + minority interest - cash
what is enterprise value - ANSWERthe value of the company's core business
operations to all investors
Why do you subtract cash in the formula for Enterprise Value? - ANSWERcash is used
to fulfill our other obligations such as debt and to other stakeholders
what is equity value - ANSWERthe value of all its assets to equity investors only
equity value is the same thing as - ANSWERmarket cap
equity value formula - ANSWERequity value = number shares outstanding * current
market price
(All Technicals) 400 Questions & Answers: A+ Guide
Solution
company value - ANSWERCash Flow / (Discount Rate - Cash Flow Growth Rate)
why do we need the 3 financial statements - ANSWERestimate cash flow so you can
estimate the value of the company
order of line items of income statement - ANSWERrevenue - COGS = Gross Profit -
Operating Expenses = Operating Income +/- Other Income/Expense = Pretax Income
- taxes = net income
income statement - ANSWERtracks revenues and expenses over a specific period;
shows the things that impact taxes
Free Cash Flow - ANSWERcash flow from operations - CapEx
net working capital - ANSWERcurrent assets (excluding cash and investments) -
current liabilities (excluding debt)
change in net working capital - ANSWERold net working capital - new net working
capital
positive change in net working capital - ANSWERfrees up cash
negative change in net working capital - ANSWERuses cash
EBIT - ANSWERearnings before interest and tax; operating income
EBITDA - ANSWEREarnings before interest, taxes, depreciation, and amortization;
operating income + D&A
NOPAT - ANSWERnet operating profit after taxes; operating income*(1- tax rate)
Is EBIT unlevered or levered - ANSWERunlevered
is EBITDA unlevered or levered - ANSWERunlevered
is NOPAT unlevered or levered - ANSWERunlevered
What does DCF stand for? - ANSWERDiscounted Cash Flow Analysis
what kind of valuation is DCF - ANSWERintrinsic
, what is intrinsic valuation - ANSWERvaluing a company based on its cash flows
what is relative valuation - ANSWERlooking at comparable companies that are
similar to the company you are valuing based on size, growth, industry, etc and
determine if the company you're valuing should be at a premium or not based on
the valuation multiples of the comparable companies
what are examples of intrinsic valuation - ANSWERDCF, Leveraged buy out model,
precedent transaction
what is a DCF - ANSWERan intrinsic valuation method that can be broken down into
3 parts: historical and projection period, WACC, and terminal model
first we use historical financial data and we project that data forward to find future
cash flows for the next 5 years
then we calculate WACC which is the weighted average cost of capital to represent
the opportunity cost of investing in the company
the WACC formula is WACC = (%debt)(cost of debt)(1-tax rate) + (%equity)(cost of
equity)
After this, we find the terminal model, which can be found using the Gordon Growth
Rate or Terminal multiple (EV/EBITDA)
Then we will discount the terminal value using the same WACC to find the present
value of the terminal value and add this to the present value of the projected cash
flows to get the enterprise value
then you use the enterprise value to find the equity value
enterprise value formula - ANSWEREnterprise value = equity value + debt + preferred
stock + minority interest - cash
what is enterprise value - ANSWERthe value of the company's core business
operations to all investors
Why do you subtract cash in the formula for Enterprise Value? - ANSWERcash is used
to fulfill our other obligations such as debt and to other stakeholders
what is equity value - ANSWERthe value of all its assets to equity investors only
equity value is the same thing as - ANSWERmarket cap
equity value formula - ANSWERequity value = number shares outstanding * current
market price
