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The Technical Interview Guide to Investment Banking, + Website by Paul Pignataro

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CHAPTER 5Valuation Questions

  1. 1) What is the difference between book value and market value of a public company?

    Book value is the shareholders' equity as listed on a company's balance sheet; market value is the market capitalization (# of shares × $/share) of a business.

  2. 2) How is the market value of a business calculated?

    Market value is calculated by multiplying the number of shares outstanding by the current share price.

  3. 3) How is the enterprise value of a business calculated?

    Enterprise value is calculated by adding net debt to a company's market value. Net debt is the company's total debts (plus capital leases, certain convertible securities, and non-controlling interests if any) less cash.

  4. 4) Why is it important to remove cash from net debt to arrive at an enterprise value of a business?

    Removing cash leaves us with a value that represents the core operating assets of a business.

  5. 5) What is the difference between a market multiple and a purchase multiple?

    A market multiple is a multiple based on the current valuation of a company; a purchase multiple is based on the price paid for a company.

  6. 6) Why is Market Value/EBITDA not a good comparable multiple?

    Market value is the value of a business after lenders have been paid; EBITDA (before interest) is a metric before lenders have been paid.

  7. 7) What are the three major methods of valuation?
    1. Comparable company analysis
    2. Precedent transactions analysis
    3. Discounted cash flow analysis
  8. 8) What is the purpose of the discounted ...

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