Basic Qs Flashcards
Why do we look at both enterprise and equity value?
Equity value is the sticker price, while enterprise value is representative of its true value
How do you use equity value and enterprise value differently
Equity - general idea of company’s worth
Enterprise - how much to acquire
If denominator of valuation multiple includes interest income and expenses - use equity value
Whats the formula for enterprise value?
Enterprise Value = Equity Value + Debt + Preferred Stock + Noncontrolling Interests – Cash
Why do you need to add NCI to enterprise value
Denominator represents 100% of financial performance, so need to add so numerator matches
How do you calculate diluted shares and diluted equity value?
Take the basic share count and add in dilutive effect of stock option and any other dilutive securities.
Why bother calcculating share dilution.
To more accurately determine the cost of acquiring a company
Why do you subtract cash in the Enterprise Value formula
- because it reduces the cost of acquiring
But not always accurate as technically you should only subtract the excess cash, but in practise, minimum cash is hard to determine, so to account for this and standardise the process along all companies, just subtract entire cash balance
Is it always accurate to add debt to equity value when calculating enterprise value
Usually yes, as terms of debt issuance tend to state that debt must be repaid in acquisition.
- also to standardise the enterprise value calculation
Could a company have a negative enterprise value
Yes
- large cash balance
- low market cap
Could a company have negative equity value
No, cant have:
- negative share count
- negative share price
Why do we add preferred stock to get to enterprise value?
Preferred stock pays out a fixed dividend, and preferred shareholders also have a higher claim to a company’s assets than equity investors do
- therefore more similar to debt than common stock
- preferred stock must be repaid in an acquisition scenario
How do you factor convertible bonds into the enterprise value calculation?
- if convertible bonds are in the money, count as additional dilution - just add
- if out of the money, then count face value of convertibles as company’s debt
What’s the difference between equity value and shareholder’s equity
Equity value is the market value and shareholders equity is the book value.
- shareholders could be negative, EV cant
- for healthy companies, EV > SE as market value of a company’s stock is worth far more than its paper valu e
Should you use enterprise value or equity value with net income when calculating valuation multiples
Equity value as net income includes the impact of interest income and interest expense
Why use enterprise value for Unlevered FCF but EV for Levered FCF
Both measure cash flow, but unlevered excludes interest income and expense - so use enterprise for that
