IB Interview Questions: Level 3 Valuation Questions

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1. On some occasions, Preferred Stock is included in the WACC formula. Why is that the case?


The goal of WACC is to blend the cost of capital (i.e. the expected returns) of all of our capital providers. So if a company has Preferred Stock, we have to include the proportional costs of the Preferred Stock as well as regular Debt and Equity.

2. How do we incorporate Minority Interests into the Enterprise Value and Equity Value formulas? Why do we need to include Minority Interests in the first place?

When working from Enterprise Value to Equity Value, we subtract the value of Minority Interests.

When working from Equity Value to Enterprise Value, we add the value of Minority Interests.

Minority interests reflect a separate ownership claim on the equity of a business and thus must be accounted for.

3. EV is Equity + Net Debt. A business has a $100 EV, $40 of Debt, and $10 of cash and generates an extra $2 of cash, what’s the EV?

The overall purchase price of the business should remain the same, so the Enterprise Value is still $100.

If the question were asking about Equity Value, then we could say that Equity Value increased by $200.

There are a lot of red herrings in this question, but the key is to understand that Enterprise Value reflects the overall sale price of the Business.

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