Enterprise/Equity Value Questions Basic & Advanced

Question 1

Why do we look at both Enterprise Value and Equity Value? What do they represent?

Answer 1

Enterprise Value: value of the company that is attributable to all investors;
Equity Value only represents the portion available to shareholders(equity investors)

Question 2

During acquisition, do you pay more attention to enterprise or equity value?

Answer 2

Enterprise value, bc that’s how much an acquirer really pays and includes the often mandatory debt repayment

Question 3

Formula for Enterprise Value?

Answer 3

EV = Equity Value + Debt + Preferred stock + Minority Interest - Cash

Question 4

What is fully diluted shares?

Answer 4

Fully diluted shares are the total number of common shares of a company that will be outstanding and available to trade on the open market after all possible sources of conversion, such as convertible bonds and employee stock options, are exercised.
Fully diluted shares include not only those which are currently issued but also those that could be claimed through conversion.

Question 5

How to calculate fully diluted shares?

Answer 5

Take the basic share count and add in the dilutive effect of stock options and any other dilutive securities, such as convertible debt, convertible preferred stock, warrants(give you the right to buy stock at a particular price).

Question 6

What is dilutive effect?

Answer 6

Only when other convertible stocks have lower price than the shares outstanding prices, they have dilutive effect, otherwise, no.

Question 7

Why do you subtract cash in the formula for enterprise value?

Answer 7

Because it is considered a non-operating asset and bc Equity Value implicitly accounts for it.

Question 8

Is it always accurate to add Debt to Equity Value when calculating Enterprise Value?

Answer 8

Bc the terms of a debt agreement usually say that debt must be refinanced in an acquisition, mostly, buyer will pay off seller’s debt.
However, exceptions can be buyer do not pay off the debt.

Question 9

Could a company have a negative Enterprise Value? What would that mean? 2 situations?

Answer 9

Yes, it means company has an extremely large cash balance, or an extremely low market cap, or both.

1. bank, financial institutes
2. about to bankrupt

Question 10

Can a company have negative equity value?

Answer 10

No. not possible to have negative shares.

Question 11

Why do we add preferred stocks to get to enterprise value?

Answer 11

preferred stock pay out a fixed dividends, and have higher claims than equity investors do, almost similar to debt than common stock

Question 12

How do you account for convertible bonds in the Enterprise Value Formula?

Answer 12

If in the money, you count them as additional dilution to the EV, if out of the money, then count the face value of the convertible as part of debt

Question 13

Difference between Equity Value and Shareholder’s Equity

Answer 13

Equity Value is the market value and Shareholders’ Equity is the book value

Question 14

How was the enterprise value formula too simple?

Answer 14

There are a lot of other things you need to add into the formula for real companies:
Like 
- Net Operating Losses (similar to cash)
- Long-term investments 
 (should be counted, similar to cash)
- Pension obligations - debt as well

Question 15

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

Answer 15

Technically, market value for everything.

But apart from equity value, others are hardly possible to find market values.

Question 16

what percentage dilution in equity value is too high?

Answer 16

Anything over 10% is odd usually.