Enterprise / Equity Value Flashcards
Why do we look at both Enterprise Value and Equity Value?
Enterprise value represents the value of the company that is attributable to all investors, Equity Value only represents the portion available to shareholders. You look at both because Equity Value is the number the public at large sees, while Enterprise Value represents its true value.
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 an acquirer really “pays” and includes the often mandatory debt repayment.
What’s the formula for Enterprise value?
EV = Equity Value + Debt + Preferred Stock + Minority Interest - Cash
Why do you need to add minority interest to enterprise value?
Whenever a company owns 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?
Cash is subtracted because it’s considered a non-operating asset and because Equity Value implicitly accounts for it.
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.
Is it always accurate t add Debt to Equity Value when calculating Enterprise Value?
In most cases, yes, because the terms of a debt agreement usually say that debt must be refinanced in an acquisition. And in most cases a buyer will pay off a seller’s debt, so it is accurate to say that any debt “adds” to the purchase price.
Could a company have a negative Enterprise Value? What would that mean?
Yes, it means that the company has an extremely large cash balance or an extremely low market capitalization.
You see it with companies on the brink of bankruptcy or financial institutions, such as banks, that have large cash balances.
Could a company have a negative Equity Value? What would that mean?
No. This is not possible because you cannot have a negative share count, and you cannot have a negative share price.
Why do we add Preferred Stock to get to Enterprise Value?
Preferred stock pays out a fixed dividend, and preferred stockholders also have 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.
How do you account for convertible bonds in the Enterprise Value formula?
If the convertible bonds are 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.
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 the Enterprise Value?
Technically, you should use market value for everything. In practice, however, you usually use the 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.
What percentage dilution in Equity Value is “too high”
There’s no strict rule but most bankers would say that anything over 10% is odd.
