Advanced Qs Flashcards
Name a few other items that might be part of enterprise value and if you add or subtract
- apart from cash, debt, preferred stock, NCI
Subtracted:
- NOLs
- ST and LT investments
- Equity investments
Added:
- capital leases
- operating leases
- unfunded pension obligations
Complete enterprise value formula
Equity value - cash + debt + preferred stock + NCI - NOLs - investments - equity investments + capital leases + unfunded pension obligations and other liabilities
Why add back unfunded pension obligations and not something like accounts payable
Distinction: magnitude and source funds
- AP usually can be paid back by company’s cash flow from normal business
- UPO usually requires additional funding to be paid
Do you always subtract equity interests
Equity interests refer to minority stakes company holds.
- Only subtract to avoid overestimating company’s own performance. if the metric you are looking at does not include net income from equity interests, e.g. revenue, EBIT, EBITDA
- if the LFCF was calculated using the standard method - adjusting CFO to subtract net income from equity interests, should also subtract equity interest, to count value of equity interests.
- if LFCF calculated with other method, which doesn’t subtract net income, then dont sub equity interests
Should you use book value or market value of each item when calculating enterprise value
Technically, market value.
- in practise used only for EV because its difficult to determine market values for the rest of the items in the formula.
- so you take those numbers from the balance sheet
What % dilution in EV is too high
No strict rule here, but most say anything over 10% is unusual
How do you factor convertible preferred stock in the enterprise Value calculation
Same way you factor in normal convertible bonds:
- if in the money, assume new shares created
- if out of the money, assume as debt
How do you factor RSUs and performance shares when finding DEV
RSU should be added to normal share account
Performance shares are same as convertible bonds, but if not in the money they are not counted as debt - instead ignored
Whats the distinction between options exercisable vs options outstanding?
Normally companies put in place restrictions on when employees can actually exercise options - so even if there are 1 million options outstanding right now, only 500k may be exercisable even if they are all in the money
- argument for either to be used, key is to remain consistent
What is levered free cash flow?
Amount of cash company generates after accounting for interest payments on debt.
- reflects cash available to equity holders after paying all operating expenses, CapEx And interest on debt, but before dividends or repaying principal debt
LFCF = operating cash flow - CapEx - interest payments
What is free cash flow to equity
- same as levered free cash flow
Cash flow available to a company’s equity shareholders after all operating expenses, CapEx, interest and debt payments have been covered.
FCFE = Net Income + Non-Cash Expenses - Capital Expenditures - Changes in Working Capital - Net Debt Repayments
- to measure cash available to shareholders, and assess dividends and share repurchases.
What is FCFF?
- same as unlevered free cash flow
Cash generated by a company’s operations which is available to all providers of capital, before any interest or debit repayments paid:
Why do we use enterprise value multiples without interest expense and income ?
- core operations focus: EV multiples assess a company’s value based on operational performance, excluding interest which is related to financing
- capital structure neutrality: excludes interest to ensure comparability across companies with different financing structures
- EV includes all capital - providing total value perspective of company
- consistency: allows for a consistent comparison of companies, irrespective of interest expenses or income.
Why do we use equity value multiples with interest expense and income ?
- reflects value of shares available to equity holders
- includes interest income and expense as they impact net income and shareholder returns
- accurately reflects financial performance and valuation from equity holder’s perspective.
