Financial Analyst Interview Questions & Financial Modeling

Assuming a 40% tax rate: On the Income Statement, operating expenses increase by $10 due to depreciation, reducing operating income (EBIT) by $10. With 40% tax, taxes decline by $4, resulting in a Net Income reduction of $6. On the Cash Flow Statement, Net Income starts down $6, but since depreciation is a non-cash expense, we add back $10 in Cash Flow from Operations, leaving ending cash up by $4. On the Balance Sheet, PP&E is down by $10, Cash is up by $4 (assets down $6), and Retained Earnings is down by $6 (equity down $6). The Balance Sheet balances.

Enterprise Value (EV) represents the total value of the company's core operating assets available to all providers of capital (debt, preferred equity, and common equity). It is calculated as Equity Value + Total Debt + Preferred Stock + Minority Interest - Cash and Cash Equivalents. Equity Value (market cap) represents the value attributable solely to common shareholders after debt obligations are satisfied. You use EV when comparing operating performance (e.g. EV/EBITDA, EV/Revenue) because it is independent of capital structure.