Enterprise / Equity Value Flashcards
Enterprise Value Definition
The value of a company’s core business operations (Net Operating Assets) to ALL the investors in a company (Equity, Debt, Preferred, and possibly others)
So, excludes Non-Operating Assets, such as Cash and Financial Investments, and Non-Operating Liabilities, such as Debt
Does not change with capital structure (% of Equity versus Debt)
Changes only if Net Operating Assets changes; if it does, both NOA and TEV change by the same amount
Equity Value Definition
The value of EVERYTHING a company has (Net Assets), but only to Equity Investors (common shareholders)
i.e. the value of shareholders’ interest
Changes only if Common Shareholders’ Equity Changes; if it does, both CSE and Equity Value change by the same amount
Enterprise Value Formula
Enterprise Value = Market Value of Assets - Market Value of Liabilities - Non-Operating Assets + Liability and Equity Items That Represent Other Investor Groups
E.g., subtract Equity Investments (Non-Core / Non-Operating), and add Noncontrolling Interests (represent another investor group, beyond the common shareholders)
Also, EV = Equity Value + Debt + Preferred Stock + Minority Interest - Cash
Equity Value Formula
Three ways to calculate Equity Value
1) Equity Value = Shares outstanding * Current share price (for publicly traded cos)
2) Equity Value = Market Value of Assets - Market Value of Liabilities
3) The company’s valuation in its last round of funding, or its valuation in an outside appraisal (for private companies)
Examples of Non-Operating Assets
- cash
- financial investments, such as stocks and bonds
- owned properties from which the co earns rental income
- side businesses that earn income for the co
- assets held for sale and assets associated with discontinued operations
- equity investments or associate companies, which represent minority stakes in other companies
- Net Operating Losses (NOLs), which are a component of the Deferred Tax Assets
An Asset is Non-Core or Non-Operating if the co doesn’t need that Asset to sell products/services and deliver them to customers
Examples of Operating Assets
- PP&E
- Inventory
- Accounts Receivable
- Deferred Revenue
Two step process for answering Equity and Enterprise Value questions:
1) Does CSE change?
If so, then Equity Value changes by the amount that CSE changes. If not, then Equity Value does not change.
2) Do Net Operating Assets (NOA) change?
If so, then Enterprise Value will change by the amount NOA changes. It doesn’t matter which investor group was responsible because Enterprise Value reflects all investors.
Examples of Operating Liabilities
-deferred revenue
Is Enterprise Value capital structure-neutral?
Instead of saying, “Enterprise Value stays the same regardless of capital structure, but Equity Value changes as the capital structure changes,” it’s better to think of it as “Enterprise Value is less affected by capital structure than Equity Value”
Think about WACC and the all-important formula
Examples of Liability and Equity Items That Represent Other Investor Groups
- Debt
- Preferred Stock
- Capital Leases
- Noncontrolling Interests
- Unfunded Pensions
- (potentially) Operating Leases
Look at Balance Sheet for this stuff
What do you pair with Enterprise Value?
Revenue, EBIT, EBITDA, and EBITDAR
What do you pair with Equity Value?
Net Income (P / E is the multiple)
What does “Free Cash Flow” reflect?
How much discretionary cash flow a company generates, after interest but before debt principal repayments?
EBIT and EBITDA are approximations of this cash flow; Free Cash Flow based metrics move us closer to the real thing
How do you calculate Free Cash Flow?
Free Cash Flow = Cash Flow from Operations - CapEx (assuming CFO deducts the Net Interest Expense, Taxes, and the full Lease Expense)
It tells you how much cash flow the company’s core business is generating on a recurring basis … i.e., how much Debt principal the co could repay, or how much it could spend on activities such as acquisitions, dividends or stock repurchases
Multiples: P / FCF per Share; or Equity Value / FCF
FCF reflects co’s capital structure, which you don’t necessarily want
How do the main types of FCF differ?
1) Investor groups
2) Treatment of Debt
Unlevered Free Cash Flow
Discretionary cash flow available to All Investors (as if the co did not pay interest on Debt or Preferred Dividends)
Aka Free Cash Flow to Firm
You don’t start with CFO b/c you must exclude or “add back” the Net Interest Expense
Starting point is NOPAT = EBIT * (1 - Tax Rate)
NOPAT + D&A and sometimes other non-cash adjustments +/- Change in Working Capital - CapEx
Normally used in DCF valuations b/c it lets you evaluate a co while ignoring its capital structure
Multiple: TEV / UFCF
What is Free Cash Flow?
Discretionary cash flow available only to Equity Investors (i.e. how much discretionary cash flow does the company generate, after interest but before debt principal repayments)
It tells you how much cash flow the company’s core business is generating on a recurring basis … i.e., how much Debt principal the co could repay, or how much it could spend on activities such as acquisitions, dividends or stock repurchases
Useful for standalone co analysis (as opposed to comparing, given that it reflects capital structure) and determining a company’s Debt repayment capacity
Multiples: P / FCF per Share; or Equity Value / FCF
FCF reflects co’s capital structure, which you don’t necessarily want
Levered Free Cash Flow
Discretionary cash flow available only to Equity Investors (i.e. discretionary cash flow generated AFTER servicing ALL of its debt-related expenses)
Net Income to Common + D&A and sometimes other non-cash adjustments +/- Change in Working Capital - CapEx - (Mandatory?) Debt Repayments + Debt Issuances(?)
Big differences compared to UFCF: 1) Net Inc is starting point, 2) Debt Repayments and Debt Issuances should factor in, somehow (people disagree on how)
Not sure useful because people disagree on how to define it, but it could be used in a levered DCF and it may better represent the Net Change in Cash
Multiple: P / Levered FCF per Share; or Equity Value / Levered FCF
Main components of UFCF
Ignores Net Interest Expense, Preferred Dividends, and Other Income / (Expenses) and includes only the company’s core business revenue and expenses
- Revenue
- Cogs and OpEx
- Taxes
- Depreciation & Amortization
- Change in Working Capital
- Capital Expenditures
What does UFCF represent?
How much discretionary cash flow does the company generate, before both interest expense and debt principal repayments
What does Levered FCF represent
How much discretionary cash flow does the company generate, AFTER servicing ALL of its debt-related expenses
If the denominator of a TEV-based multiple does not deduct an Income Statement expense, then the numerator should add its corresponding Balance Sheet line item
Idk if worth studying
E.g. Preferred Dividends are excluded in TEV-based metrics because Preferred Stock is added in the TEV calculation
E.g. Interest on Capital Lease Liabilities is excluded in TEV-based metrics because Capital Leases are added in the TEV calculation
How do you decide whether to pair a metric with Equity Value or Enterprise Value?
If a metric does not deduct Net Interest Expense or Preferred Dividends, pair it with Enterprise Value
If a metric does deduct Net Interest Expense and Preferred Dividends, pair it with Equity Value
What does Book Value pair with?
Equity Value / Book Value, or P / BV
Tells you how efficiently a co has used its Equity, both internally generated and externally raised, to grow
Similar to TEV / IC but corresponds only to Equity Investors
Means little to most companies, because market values not linked directly to Balance Sheets
What does Net Operating Assets pair with?
TEV / NOA
What does Invested Capital pair with?
TEV / IC
Tells you how valuable a company is relative to the cumulative capital it has raised (or generated) over time
Tells you how efficiently a co is using its capital, and tends to correlate with ROIC
Consumer/Retail Multiples
The valuation multiples are all standard, and EBITDAR and the matching valuation multiple are both common under U.S. GAAP when some companies rent their stores, and others own them.
Important operating metrics include Same-Store Sales, Inventory Turnover, Sales per Store, and Sales per Square Foot or Square Meter.`
Tech Multiples
The multiples are standard for established companies, but for pre-revenue startups and
mobile/gaming companies, you’ll see metrics like Unique Visitors, Monthly Active Users, Mobile Users, and Subscribers, all of which pair with Enterprise Value.
Why do you never project Equity Value or Enterprise Value?
They represent past results as well as future expectations as of the valuation date
Pensions in Enterprise Value
UNLIKELY to come up
Only “Defined-Benefit” pension plans matter - plans where co promises to pay retired employees specific amts in future, and co is responsible for setting aside the funds and investing them appropriately
You should add the Unfunded or Underfunded portion in the TEV bridge because the employees represent another investor group in this case
They agree to lower pay and benefits today in exchange for fixed payments once they retire, and the company must fund the pension and invest funds appropriately
Capital Leases
- Debt-like items that companies use to acquire equipment, property, factories, and other PP&E
- there are Interest Expenses and Depreciation associated with Capital Leases and their corresponding Assets, and metrics like EBITDA already exclude or “add back” these expenses
- Therefore, always add Capital Leases in the Enterprise Value bridge and count them as Debt-like items
Operating Leases
Under both IFRS and GAAP, if you add Operating Leases in the TEV bridge, then you must pair TEV with metrics that exclude or “add back” the full Lease Expense. If you do NOT add Operating Leases, then you must deduct the full Lease Expense.
Under GAAP, we normally do NOT count Operating Leases in the TEV bridge so that EBIT and EBITDA remain valid metrics in the TEV/EBIT and TEV/EBITDA multiples. If you do count Operating Leases, you must use EBITDAR and TEV Including Operating Leases / EBITDAR instead.
Net Operating Losses (NOLs)
Accumulate when a company records negative Pre-Tax Income
The off-Balance Sheet NOL increases by -Pre-Tax Income, and the Deferred Tax Asset increases by -Pre-Tax Income * Tax Rate
When co finally records positive Pre-Tax Income, it can use these NOLs to reduce its Taxable Income, thereby reducing its Cash Taxes
NOLs / Enterprise Value
In the Enterprise Value bridge calculation, you subtract the on-Balance Sheet NOLs within the DTA, counting them as Non-Operating Assets
By contrast, other components of the DTA are closer to being “core” to the business
What does Equity Value mean?
Equity Value represents the value of EVERYTHING a company has (its Net Assets) but only to EQUITY INVESTORS (i.e. common shareholders)
What does Enterprise Value mean?
Enterprise Value represents the value of the company’s CORE BUSINESS OPERATIONS (its Net Operating Assets) but to ALL INVESTORS (Equity, Debt, Preferred, and possibly others)
Why do you use both EqVal and TEV?
Why do you look at both EqVal and TEV?
Actions taken by one investor group affect all the other groups
If a company raises Debt, that also affects the risk and potential returns for common shareholders
____
Enterprise Value represents the value of the company that is attributable to all investors; Equity Value only represents the portion available to shareholders (equity investors). You look at both because Equity Value is the number the public-at-large sees, while Enterprise Value represents its true value.
Why do you pair Net Assets with Common Shareholders in Equity Value, but Net Operating Assets with All Investors in Enterprise Value?
- CSE can be generated internally (via Net Income) or raised externally (Stock Issuances), so the co can use it for both Operating and Non-Operating Assets
- But if co raises funds via outside investors (Debt, Pref Stock), most likely it will use those funds to pay for Operating Assets
Difference between calculating Current Enterprise Value and Implied Enterprise Value?
Current is calculated using the formula
Implied is calculated based on valuation methodologies, such as DCF, comparable public companies, and precedent trx
Why might a company’s Current Enterprise Value be different from its Implied Enterprise Value?
Everyone agrees on a company’s current Cash Flow, but you might disagree with the market on the Discount Rate or Cash Flow Growth Rate
Can a company’s Equity Value ever be negative?
- Current Equity Value - NO
- Implied Equity Value - YES (e.g. if TEV is $0 and it has more Debt than Cash) … but typically, you describe it’s Equity Value as $0 in cases like this
Can a company’s Enterprise Value ever be negative?
Yes. Both Current and Implied Enterprise Value could be negative – for example, a company might have Cash that exceeds its Current Equity Value and no Debt. And your Implied Enterprise Value might be the same as, or close to, its Current Enterprise Value.
You estimate a co’s Implied Value with Company Value = Cash Flow / (DR - CFGR)
Does this give you Implied Equity Value or Implied Enterprise Value?
It depends on the type of Cash Flow and Discount Rate you are using
Unlevered FCF + WACC –> Implied Enterprise Value
Levered FCF or FCF to Equity + Cost of Equity –> Implied Equity Value
Is it possible for a single change to effect both Current Equity Value and Current Enterprise Value?
Yes. For this to happen, Net Operating Assets must change, and Common Shareholders’ Equity must also change.
E.g. if the company issues $100 of Common Stock to fund the purchase of $100 in
PP&E, both Eq Val and TEV will increase by $100.
Why does Enterprise Value NOT necessarily represent the “true cost” to acquire a company?
First, because the treatment of the seller’s existing Debt and Cash differs based on the terms of the deal. The buyer may not necessarily “repay” the seller’s Debt – it could instead refinance it and replace it with new Debt – and it may not “get” all the seller’s Cash.
Also, the buyer has to pay additional fees for the M&A advisory, accounting, and legal services, and the financing to acquire another company, and those are not reflected in its Enterprise
Value.
How do you calculate EBIT and EBITDA for a public company?
With EBIT, start with co’s Operating Income on its Income Statement and then add back any non-recurring charges that have reduced Operating Income
With EBITDA, you do the same thing and then add Depreciation and Amortization from the company’s Cash Flow Statement
How do you use Unlevered FCF and Levered FCF differently from normal Free Cash Flow?
- you normally use UFCF in DCF valuations b/c it lets you evaluate a co while ignoring its capital structure
- FCF is more useful for standalone company analysis and determining a company’s Debt repayment capacity
- LFCF is not very useful because of how much people disagree on its definition, but you could use it in a Levered DCF, and it may better represent the Net Change in Cash
How do you decide whether to use Equity Value or Enterprise Value when you create valuation multiples?
- if the financial metric in the denominator of the valuation multiple deducts Net Interest Expense, then it pairs with Equity Value because the Debt investors can no longer be “paid” after they earn their interest
- if metric does not deduct Net Interest Expense, then it pairs with Enterprise Value
What are the advantages and disadvantages of TEV / EBITDA vs. TEV / EBIT vs. P / E?
First, note that you never look at just one multiple when valuing companies. You want to evaluate companies across different multiples and methodologies to get the big picture.
But the interviewer will probably be annoying and press you on this point, so you can say that TEV / EBITDA is better in cases where you want to exclude the company’s CapEx and capital structure completely.
TEV/EBIT is better when you want to ignore capital structure but partially factor in CapEx (via the Depreciation, which comes from CapEx in previous years).
So, TEV / EBITDA is more about normalizing companies and more useful in industries where CapEx is not a huge value driver, while TEV / EBIT is better when you want to link CapEx to the company’s value (e.g., for an industrials company).
The P / E multiple is not that useful in most cases because it’s affected by different tax rates, capital structures, non-core business activities, and more; you use it mostly as a “check,” and since it’s a standard multiple everyone knows.
- Addtl note: EBIT is proxy for core, recurring business PROFITABILITY, before impact of capital structure and taxes; RBITDA is proxy for core, recurring business CASH FLOW FROM OPERATIONS, before the impact of capital structure and taxes.
In the TEV / EBITDAR multiple, how do you adjust Enterprise Value?
If the denominator of a valuation multiple excludes or adds back an expense on the Income Statement, then the numerator should add the Balance Sheet item corresponding to that expense
EBITDAR is EBITDA + Rental Expense, so it adds back Rental Expense
Therefore, in TEV, you must add the company’s on-Balance Sheet Operating Leases
Why do you NOT subtract Goodwill when moving from Equity Value to Enterprise Value? Co doesn’t need it to continue operating its business..
Goodwill reflects the premiums paid for previous acquisitions – if you subtracted it, you’d be saying, “Those previous acquisitions are not a part of this company’s core business anymore.” That’s true only if co has shut down or sold those other cos.
Why do you subtract only part of a company’s Deferred Tax Assets (DTAs) when calculating Enterprise Value?
Deferred Tax Assets contain many different items, some of which are related to simple timing
differences or tax credits for operational items. But you should subtract ONLY the Net Operating Losses (NOLs) in the DTA because those are considered Non-Operating Assets (and they have some potential value to acquirers in M&A deals); they’re less related to operations than the rest of the items in a DTA.
When looking at an acquisition of a company, do you pay more attention to Enterprise or Equity Value?
Enterprise Value, because that’s how much the acquirer actually “pays” and includes the often mandatory debt repayment
Why is it incorrect to use Market Value / EBITDA or EV / Net Income?
For any multiple, the denominator and numerator must either include or exclude leverage. In other words, both the numerator and denominator must relate to either all capital holders or all shareholders. Otherwise, comparisons across companies will not be “apples-to-apples”—they will be difficult to compare because different companies utilize different amounts of leverage.
Why do you need to add Minority Interest to Enterprise Value?
- Whenever a company owns over 50% of another company, it is required to report the financial performance of the other company as part of its own performance.
- So even though it doesn’t own 100%, it reports 100% of the majority-owned subsidiary’s financial performance.
- In keeping with the “apples-to-apples” theme, you must add Minority Interest to get to Enterprise Value so that your numerator and denominator both reflect 100% of the majority-owned subsidiary.
Why do you subtract cash in the formula for Enterprise Value? Is that always accurate?
The “official” reason: Cash is subtracted because it’s considered a non-operating asset and because Equity Value implicitly accounts for it.
- The way I think about it: In an acquisition, the buyer would “get” the cash of the seller, so it effectively pays less for the company based on how large its cash balance is. Remember, Enterprise Value tells us how much you’d really have to “pay” to acquire another company.
- It’s not always accurate because technically you should be subtracting only excess cash - the amount of cash a company has above the minimum cash it requires to operate
Could a company have a negative Enterprise Value? What would that mean?
1) Extremely large cash balance
2) Extremely low market cap
- common among co’s on bring of bankruptcy
- common among financial institutions
How do you account for convertible bonds in the Enterprise Value formula?
If in-the-money, then you count them as additional dilution to the Equity Value; if they’re out of the money then you count the face value of the convertibles as part of the company’s Debt
A company has 1 million shares outstanding at a value of $100 per share. It also has $10 million of convertible bonds, with par value of $1,000 and a conversion price of $50. How do I calculate diluted shares outstanding?
- ($value of conv. bonds)/par value
- Par value/conversion price
- multiply 1 & 2
Note: We do not use the Treasury Stock Method with convertibles because the company is not “receiving” any cash from us.
What’s the difference between Equity Value and Shareholders’ Equity?
Equity Value is the market value and Shareholders’ Equity is the book value. Equity Value can never be negative because shares outstanding and share prices can never be negative, whereas Shareholders’ Equity could be any value. For healthy companies, Equity Value usually far exceeds Shareholders’ Equity.
Should you use the book value or market value of each item when calculating Enterprise Value?
you should use market value for everything. In practice, however, you usually use market value only for the Equity Value portion, because it’s almost impossible to establish market values for the rest of the items in the formula - so you just take the numbers from the company’s Balance Sheet
Give me an example of how you might estimate revenue and expense synergies in an M&A deal.
With revenue synergies, you might assume that the Seller can sell its products to some of the Buyer’s customer base. So if the Buyer has 100,000 customers, 1,000 of them might buy widgets from the Seller. Each widget costs $10.00, so that is $10,000 in extra revenue.
There will also be COGS and possibly Operating Expenses associated with these extra sales, so you must factor those in as well. For example, if the cost of each widget is $5.00, then the Combined Company will earn only $5,000 in extra Pre-Tax Income.
With expense synergies, you might assume that the Combined Company can close a certain number of offices or lay off redundant employees, particularly in functions such as IT, accounting, and administrative support.
So if both companies, combined, have 10 offices, and management feels that only 8 offices will be needed after the merger, the combined rental expense will decline.
If each office costs $100,000 per year to rent, there will be 2 * $100,000 = $200,000 in expense synergies, which will boost the Combined Pre-Tax Income by $200,000.
MOVE TO MERGER SECTION
Walk me through a merger model
In a merger model, you start by projecting the financial statements of the Buyer and Seller. Then, you estimate the Purchase Price and the mix of Cash, Debt, and Stock used to fund the deal. You create a Sources & Uses schedule and Purchase Price Allocation schedule to estimate the true cost of the acquisition and its effects.
Then, you combine the Balance Sheets of the Buyer and Seller, reflecting the Cash, Debt, and Stock used, new Goodwill created, and any write-ups. You then combine the Income Statements, reflecting the Foregone Interest on Cash, Interest on Debt, and synergies. If Debt or Cash changes over time, your Interest figures should also change.
The Combined Net Income equals the Combined Pre-Tax Income times (1 – Buyer’s Tax Rate), and to get the Combined EPS, you divide that by the Buyer’s Existing Share Count + New Shares Issued in the Deal.
You calculate the accretion/dilution by taking the Combined EPS, dividing it by the Buyer’s standalone EPS, and subtracting 1.
An Acquirer with an Equity Value of $500 million and Enterprise Value of $600 million buys another company for a Purchase Equity Value of $100 million and Purchase Enterprise Value of $150 million.
What are the Combined Equity Value and Enterprise Value?
The Combined Enterprise Value equals the Enterprise Value of the Buyer plus the Purchase Enterprise Value of the Seller, so it’s $600 million + $150 million = $750 million.
You can’t determine the Combined Equity Value because it depends on the purchase method: Combined Equity Value = Acquirer’s Equity Value + Value of Stock Issued in Deal.
If it’s a 100% Stock deal, the Combined Equity Value will be $500 million + $100 million = $600 million, but if it’s 100% Cash or Debt, the Combined Equity Value = $500 million.
And if the % Stock Used is above 0% but less than 100%, the Combined Equity Value will be between $500 and $600 million.
How do the Combined Equity Value and Enterprise Value relate to the purchase method?
The Combined Enterprise Value is not affected by the purchase method: Regardless of the % Cash, Debt, and Stock used, it’s always equal to the Buyer’s Enterprise Value plus the Purchase Enterprise Value of the Seller.
The Combined Equity Value is equal to the Buyer’s Equity Value plus the Value of Stock Issued in the Deal, which could range from $0 up to the Purchase Equity Value of Seller.
So if it’s a 100% Stock deal, the Combined Equity Value = Buyer’s Equity Value + Purchase Equity Value of Seller.
How do the Combined Multiples change based on the purchase method?
Enterprise Value-based multiples do not change based on the % Cash, Debt, and Stock used because the Combined Enterprise Value is not affected by the purchase method, and EV-based metrics such as Revenue, EBITDA, and EBIT are also not affected by it.
Equity Value-based multiples will change based on the purchase method because the Combined Equity Value depends on the % Stock Used, and Equity Value-based metrics such as Net Income and Free Cash Flow are impacted by the Foregone Interest and Interest on New Debt.
Steps to create a multiple
1) Calculate numerator: EqVal or Enterprise Value
2) Calculate denominator: financial metric (Sales, EBITDA, EBIT, net income) … normalize it (often when normalizing, earnings will go up, so taxes will also go up)
Why don’t we just use cash flow multiples?
Because there are comparability issues - companies use slightly different accounting methods to set up their cash flow statements. To normalize them would take too much time.
What do profitability based multiples measure?
EBIT, EBITDA and Net Income all measure a company’s profitability. And the corresponding valuation multiples measure company’s price in relation to profits.
Common Valuation Multiples
TEV / Revenue
TEV / EBIT
TEV / EBITDA
P / E (Equity Value / Net Income, or Price per share / Earnings per share)
Multiples reflect a specific company attribute vis a vis its price.
Balance Sheet Multiples
P / BV (Equity Value / Book Value)
- tells you how efficiently the company has used its equity, bot internally generated and externally raised, to grow
TEV / NOA
TEV / IC
- tells you how valuable a company is relative to the cumulative capital it has raised (or generated) over time
In the Equity Value to Enterprise Value bridge, what do you do with equity investments and non-controlling interests?
In the equity value to enterprise value bridge, you subtract equity investments and add Non Controlling interests
Subtract equity investments because they are non-core or non-operating assets
Non controlling interests are added because they represent another investor group, beyond the common shareholders
Why do we add Preferred Stock to get to Enterprise Value?
Preferred Stock pays out a fixed dividend, and preferred stock holders also have a higher claim to a company’s assets than equity investors do. As a result, it is seen as more similar to debt than common stock.
Why do yo use both Equity Value and Enterprise Value?
Neither one is “better” or “more accurate” – they represent different concepts, and they’re
important to different types of investors.
Enterprise Value and TEV-based multiples have some advantages because they are not affected by changes in the company’s capital structure as much as Equity Value and Eq Val-based multiples are affected.
However, in valuation, one methodology might produce Implied Enterprise Value, while another might produce Implied Equity Value, so you will need to move between them to analyze a company.
Finally, you use both of them because actions taken by one investor group affect all the other groups. If a company raises Debt, that also affects the risk and potential returns for common shareholders.
Why do you add Noncontrolling Interests (NCI) when moving from Equity Value to Enterprise Value?
First, these Noncontrolling Interests represent another investor group beyond the common shareholders: the minority shareholders of the Other Company in which the Parent Company owns a majority stake. The Parent Company effectively controls this Other Company now, so it counts these minority owners as an investor group.
Second, you add NCI for comparability purposes. Since the financial statements are consolidated 100% when the Parent Company owns a majority stake in the Other Company, metrics like Revenue, EBIT, and EBITDA include 100% of the Other Company’s financials.
Equity Value, however, includes only the value of the actual percentage the Parent owns.
So, if a Parent Company owns 70% of the Other Company, the Parent Company’s Equity Value will include the value of that 70% stake. But its Revenue, EBIT, and EBITDA include 100% of the Other Company’s Revenue, EBIT, and EBITDA
Why do you subtract Equity Investments, AKA Associate Companies, when moving from Equity Value to Enterprise Value?
First, they’re Non-Operating Assets since the Parent Company has only minority stakes in these companies and, therefore, cannot control them.
Second, you subtract them for comparability purposes. Metrics like EBITDA, EBIT, and Revenue
include 0% of these companies’ financial contributions, but Equity Value implicitly includes the
value of the stake (e.g., 30% of the Associate Company’s Value if the Parent owns 30% of it).
Therefore, you subtract the Equity Investments when moving from Equity Value to Enterprise
Value to ensure that the numerator of TEV-based multiples – Enterprise Value – completely excludes Equity Investments, matching the metrics in the denominator that also exclude them.
Should you add on-Balance Sheet Operating Leases in the Equity Value to Enterprise Value bridge?
You dont have to
But if you do, you have to pair TEV Including Operating Leases with EBITDAR; multiples such as TEV / EBIT and TEV / EBITDA are no longer valid because the denominators deduct the full Rental Expense
At a high level, how do Pensions factor into the Enterprise Value calculation?
Only Defined-Benefit Pension plans factor in because Defined-Contribution Plans do not appear on the Balance Sheet.
How do you use valuation multiples in real life?
Most often, you use them in “Comparable Company Analysis” or “Public Comps” when you find public companies similar to the one you’re analyzing and use their multiples to value your company.
For example, you might screen companies by geography, industry, and financial size so that they are similar to your company.
Then, you look at the growth rates of various metrics and their corresponding multiples to see how your company is currently priced.
For example, if the median EBITDA growth of this set of companies is 10%, and your company is growing at 20%, but your company’s TEV / EBITDA and the median TEV / EBITDA of the set are similar, then perhaps your company is undervalued.
If the companies are truly comparable, then they should have similar Discount Rates and Cash Flow figures. So, the differences in Cash Flow Growth Rates should explain most of the difference in the multiples.
What are some of the different ways you calculate Unlevered FCF?
When you calculate Unlevered FCF starting with EBIT * (1 – Tax Rate), or NOPAT, you’re
not counting the tax shield from the interest expense. Why? Isn’t that incorrect?
No, it’s correct. If you’re ignoring the company’s capital structure, you have to ignore
EVERYTHING related to its capital structure. You can’t say, “Well, let’s exclude interest… but
let’s still keep the tax benefits from that interest.”
The tax savings from the interest expense do not exist if there is no interest expense.
