Wall Street Prep Questions And Answers With Verified
Solutions 100% Correct (Graded A+) Latest Update
2024/2025.
Valuation - ANSWER Process of determining the "right" value of a business, several approaches
used, influenced by objectives of those doing the valuation
How do you value a company? - ANSWER There are a number of ways, mainly fall under two
categories:
1. Intrinsic Valuation - based on ability of company to generate cash flows. DCF is most common type of
intrinsic valuation - looks at company's cash flow forecasts and risks.
-Discounted Cash flow: value a company by looking at the future cash flows it can generate and discount
them to the present to arrive at a present value of your business
2. Relative Valuation - looks at multiples of comparable companies and applies mean/median multiple
from peer group. Can be multiples of current market values (trading comps) or historical acquisition
multiples (deal comps)
-Comparable company analysis: value a company by finding similar companies that are public and have
readily observable market prices.
-Comparable (precedent) transactions analysis: value a company by looking at the amount buyers have
paid for acquiring similar companies in the recent past
How do you value a company when not using DCF or relative valuation? - ANSWER 1. Leveraged
Buyout Analysis: a specific type of valuation approach that looks at the value of a company to new
acquirers under a highly leveraged scenario with specific return requirements. Hybrid of DCF and comps
valuation.
2. Liquidation (Bankruptcy) Analysis: value a company under a worst case liquidation scenario.
What's the difference between equity and enterprise value? - ANSWER Equity Value: the value
of a business to its owners.
-Cash: includes cash as well as nonoperating assets like marketable securities, short term investments,
equity investments
-Debt: includes straight debt (loans, revolver, bonds) as well as debt-like investments like capital leases,
non-controlling interests, preferred stock
, =Enterprise value - net debt
Enterprise value: value of a company's operations, not its equity
=Operating Assets - Operating Liabilities
-Operating Assets: all assets except for cash and other investment assets
-Operating Liabilities: all liabilities except for debt and debt like liabilities
What's the difference between book and market value? - ANSWER Book value: a company's
value as a function of what the balance sheet tells us.
Market value: usually higher than book value since it is a function of future expectations, not historical
carrying values
-enterprise market value: equity market value - cash + debt
Do finance professionals ever rely on book values? - ANSWER Yes, when valuing financial
institutions. That's because the balance sheet values of bank assets (loans and investments) and
liabilities (deposits) tend not to deviate too far from actual fair value (unlike PP&E and intangible assets).
The other major exception is when doing a liquidation analysis for a troubled company.
Discounted Cash Flow -> Present Value Math - ANSWER Present Value t=0 = Cash Flow t=1 /
(1+r)^t=1
Value t=0 = n=t∑t=1 Cash Flow t / (1+r)^t
Unlevered vs Levered DCF ... Ways to calculate cash flows - ANSWER Unlevered DCF: forecast
and discount the OPERATING cash flows. That gets you enterprise value. Then, when you have a present
value, just add any non-operating assets such as cash and subtract any financing related liabilities such as
debt. That will get you equity value
Levered DCF: forecast and discount the cash flows that remain available to equity shareholders after
cash flows to all non-equity claims (i.e. debt) have been removed. That get you equity value. Add back
net debt and you will get enterprise value.
Both should lead to the same values. Unlevered is more common. Levered is mainly used for financial
institutions.
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