Enterprise / Equity Value Flashcards
Why do we look at both Enterprise Value and Equity Value?
EV - value of the firm attributable TO ALL INVESTORS
Equity Value - portion attributable TO EQUITY.
We look at both b/c Equity is what the public sees, but EV is true value.
When looking at an acquisition of a company, do you pay more attention to Enterprise or Equity Value?
Enterprise, b/c that’s what you REALLY PAY and includes often mandatory debt repayment.
What’s the formula for Enterprise Value?
EV = Equity Value + NET Debt + Preferred Stock + Minority Interests
Why do you need to add Minority Interest to Enterprise Value?
If a company owns more than 50% of another, it must fully consolidate its performance in its F/S. We add Minority Interest so that EV fully reflects a comparable figure - EBITDA will reflect full performance, so apples-to-apples.
How do you calculate fully diluted shares?
Take basic shares and add dilutive effect of stock options and other dilutive securites (i.e., warrants, converts). We often use Treasury Stock Method.
Assume a company has 100 shares outstanding, a share price of $10 and 10 options outstanding at a strike price of $5 each - what’s fully diluted equity value?
- Basic equity value = 100 x $10 = $1,000.
- TSM: Receive $50 from option exercise, creating 10 new shares; spend that $50 to buy back 5 shares, creating 5 new ones.
- TOTAL = (100 + 5) x $10 = $1,050.
Assume a company has 100 shares, a share price of $10 and 10 options outstanding (strike = $15) - what’s fully diluted equity value?
Options are out-of-the-money, so 100 x $10 = $1,000.
Why do you subtract cash in the EV formula? Always accurate?
Officially, because cash is a non-operating asset and it’s implicitly counted in equity value.
Unofficially, because an acquiror can use the target’s cash to pay for the acq., or repay debt.
Is it always accurate to add debt to equity value when calculating EV?
Generally, yes, because debt usually has to be repaid in CoC. However, there could be exceptions.
Could a company have a negative EV? What would it mean?
Yes - Low market cap, low debt and a lot of cash.
Examples:
- Companies verging on bankruptcy;
- Financial institutions with lots of cash.
Could a company have a negative equity value?
No - market cap must be positive.
Why do we add Preferred Stock to get to EV?
It functions somewhat like debt: receive fixed dividend and is above common in priority.
How do you account for convertible bonds in the EV formula?
In-the-money: count as add’l dilution to equity value
Out-of-the-money: count face value as debt
Assume a company has 1M shares outstanding, share price of $100 and $10M of convertible bonds (par = $1,000, conversion price = $50). What’s DSO?
Each $1K converts into 20 shares, so 200,000 new shares; DSO = 1.2M.
Difference between Equity Value and S/E?
Market number vs. historical figure.
