Enterprise/Equity Value Advanced

Question 1

Are there any problems with the enterprise value formula you just gave me?

Answer 1

Yes, it is too simple. There are lots of other things you need to add into the formula with real companies.

Net Operating losses should be valued, and arguably, added in similar to cash

Long-term investments, they should be converted similar to cash

Equity investments, any investments in other companies should also be added in similar to cash, though they might be discounted

Capital leases like debt have interest payments so they should be added in like debt

Some operating leases sometimes you need to convert operating leases to capital leases and add them in as well

Unfunded pension obligations sometimes these are counted as debt as well

Enterprise value = equity value - cash + debt + preferred stock + minority interest - NOLs - L T and equity investments + capital leases + unfunded pension, obligations

Question 2

Should you use the book value or market value of each item when calculating enterprise value?

Answer 2

Technically, you should use market value for everything, but you usually only use market value for equity value

It’s rather impossible to establish market values for the rest of the items in the formula. Just take numbers from the companies balance sheet.

Question 3

What percentage dilution in equity value is too high?

Answer 3

There’s no strict rule but most bankers would say anything over 10% is odd or in the 10 to 15% range

If basic equity value is $100 million and the diluted equity value is 115 million you might want to check your calculations. It is not necessarily wrong but over 10% dilution is unusual for most companies.

Dilution reduces ownership stake of existing shareholders

Decrease in stock price due to increase supply of shares loss of control for the existing shareholders