Valuation (Wall Street Prep)
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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-
ations? 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 highvaluation 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 x 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-
ing? 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 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?
, Valuation (Wall Street Prep)
Study online at https://quizlet.com/_fdj00h
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 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 = EV - 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
, Valuation (Wall Street Prep)
Study online at https://quizlet.com/_fdj00h
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).
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
lower than its eq- If it seems counter-intuitive that enterprise value can be lower than equity value,
uity 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 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. Imagine a company with
negative? $1,000 in cash, no other assets and $500 in debt and $200 in accounts payable.
There is $300 in equity in this business, while the enterprise value is -$200.
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
enterprise value However, the cost of financing (i.e., through financing fees and interest expense)
change? could negatively impact the company's profitability and lead to a lower valuation
from the higher cost of debt.
, Valuation (Wall Street Prep)
Study online at https://quizlet.com/_fdj00h
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% of
to equity value in another company but below 100% (called a "minority interest" or "non-controlling
the calculation of investment"), it must include 100% of the subsidiary's financials in their financial
enterprise value? 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 convert- If the convertible bonds and the preferred equities are "in-the-money" as of the
ible bonds and valuation date (i.e., the current stock price is greater than their strike price), then
preferred equi- the treatment will be the same as additional dilution from equity. However, if
ty with a con- 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 1. Intrinsic Valuation: For an intrinsic valuation, the value of a business is arrived
main approaches at by looking at the business's ability to generate cash flows. The discounted cash
to valuation? 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.
2. Relative Valuation: In relative valuation, a business's value is arrived at by 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.
Study online at https://quizlet.com/_fdj00h
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-
ations? 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 highvaluation 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 x 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-
ing? 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 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?
, Valuation (Wall Street Prep)
Study online at https://quizlet.com/_fdj00h
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 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 = EV - 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
, Valuation (Wall Street Prep)
Study online at https://quizlet.com/_fdj00h
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).
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
lower than its eq- If it seems counter-intuitive that enterprise value can be lower than equity value,
uity 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 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. Imagine a company with
negative? $1,000 in cash, no other assets and $500 in debt and $200 in accounts payable.
There is $300 in equity in this business, while the enterprise value is -$200.
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
enterprise value However, the cost of financing (i.e., through financing fees and interest expense)
change? could negatively impact the company's profitability and lead to a lower valuation
from the higher cost of debt.
, Valuation (Wall Street Prep)
Study online at https://quizlet.com/_fdj00h
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% of
to equity value in another company but below 100% (called a "minority interest" or "non-controlling
the calculation of investment"), it must include 100% of the subsidiary's financials in their financial
enterprise value? 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 convert- If the convertible bonds and the preferred equities are "in-the-money" as of the
ible bonds and valuation date (i.e., the current stock price is greater than their strike price), then
preferred equi- the treatment will be the same as additional dilution from equity. However, if
ty with a con- 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 1. Intrinsic Valuation: For an intrinsic valuation, the value of a business is arrived
main approaches at by looking at the business's ability to generate cash flows. The discounted cash
to valuation? 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.
2. Relative Valuation: In relative valuation, a business's value is arrived at by 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.
