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WALLSTREET PREP VALUATION QUESTIONS WITH THE LATEST UPDATE
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WALLSTREET PREP VALUATION QUESTIONS WITH THE LATEST UPDATE
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WALLSTREET PREP VALUATIONQUESTIONS WITH THE LATEST
UPDATE
4. What is enter- prise value and how do you cal-
1. Could you ex-
culate it?
plain the concept
of present value
and how it re-
lates to company
valuations?
2. What is equity
value and how is
it calculated?
3. How do you cal-
culate the fully
diluted number
of shares out-
standing?
, WALLSTREET PREP VALUATION
QUESTIONS WITH THE LATEST
UPDATE
interchangeably with the term market capital- ization
The present value
("market cap"), equity value represents a compa- ny's
concept is based on
value to its equity shareholders. A company's equity
the premise that "a
value is calculated by multiplying its latest closing share
dollar in the present
price by its total diluted shares outstanding, as shown
is worth more than a
below:
dollar in the future"
due to the time value
Equity Value = Latest Closing Share Price × Total Diluted
of money. The reason
Shares Outstanding
being money
currently in The treasury stock method ("TSM") is used to calculate
possession has the the fully diluted number of shares outstanding based on
potential to earn the options, warrants, and other dilutive securities that are
interest by being currently "in-the-money" (i.e., profitable to exercise).
invested today. The TSM involves summing up the number of in-the-mon-
For intrinsic valuation ey ("ITM") options and warrants and then adding that
methods, the value of figure to the number of basic shares outstanding.
a company will be In the proceeding step, the TSM assumes the proceeds
equal to the sum of from exercising those dilutive options will go towards re-
thepresent value of purchasing stock at the current share price to reduce the
all the future cash net dilutive impact.
flows it generates.
Therefore, a company Conceptually, enterprise value ("EV") represents the val-
with a high valuation ue of the operations of a company to all stakeholders
would imply it including common shareholders, preferred shareholders,
receives high returns and debt lenders.
on its invested capital
by investing in
positive net present
value ("NPV")
projects consistently
while having low risk
associated with its
cash flows.
Often used
, WALLSTREET PREP VALUATION
QUESTIONS WITH THE LATEST
UPDATE
ference between enterprise value and equity val-
ue?
5. How do you cal-
culate equity val-
ue from enter-
prise value?
6. Which line items
are included in
the calculation of
net debt?
7. When calculat-
ing enterprise
value, why do we
add net debt?
8. What is the dif-
, WALLSTREET PREP VALUATION
QUESTIONS WITH THE LATEST
UPDATE
Thus, enterprise Enterprise Value - Net Debt - Preferred Stock -
value is considered Minority Interest
capital structure
neutral, unlike equity The calculation of net debt accounts for all interest-bear-
value, which is ing debt, such as short-term and long- term loans and
affected by financing bonds, as well as non-equity financial claims such as
decisions. preferred stock and non- controlling interests. From this
Enterprise value is gross debt amount, cash and other non-operating assets
calculated by taking such as short-term investments and equity investments
the company's are subtracted to arrive at net debt.
equity value and
adding net debt, Net Debt = Total Debt - Cash & Equivalents
preferred stock,
and minority The underlying idea of net debt is that the cash on a
interest. company's balance sheet could pay down the outstanding
debt if needed. For this reason, cash and cash equiva-
Enterprise Value = lents are netted against the company's debt, and many
Equity Value + Net leverage ratios use net debt rather than the gross amount.
Debt + Preferred
Enterprise value represents all stakeholders in a busi-
Stock + Minority
ness, including equity shareholders, debt lenders, and
Interest
preferred stock owners. Therefore, it's independent of the
To get to equity value capital structure. In addition, enterprise value is closer to
from enterprise value, the actual value of the business since it accounts for all
you would first ownership stakes (as opposed to just equity owners).
subtract net debt,
where net debt
equals the com-
pany's gross debt and
debt-like claims (e.g.,
preferred stock), net
of cash, and non-
operating assets.
Equity Value =
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