Equity and Enterprise Value Flashcards
Why do we look at both enterprise and equity value.
Equity value - market consensus, what is available to equity stakeholders.
Enterprise value - transactional value, when merging, acquiring or constructing a deal, this is available to debt and equity stakeholders.
Formula for enterprise value
Enterprise = equity + debt equiv. + preferred stock + non-controlling interests - cash equiv.
Why add non-control to enterprise value
Accounting standards maintain that if you own 51% of a company you report 100% of its revenues and expenses. In order to make your valuation multiples have any meaning, you must normalize for the others stake of ownership.
Diluted share, diluted equity value calculation
Diluted share # is the number of additional shares remaining after you settle all in-the-money calls (and call equivalents).
Formula: (#calls) * ($ face - $ settle) / ($ face)
Diluted share value is the
Diluted equity value is the new number of shares * market price. More accurate for diluted enterprise value calculations
Why do wo calc share dilution
It provides a more accurate picture of what the company will cost to acquire. It is standard in m&a for there to be clauses relating to settling all outstanding calls
Is it always accurate to sub cash from enterprise value
no because it should only be excess cash, some cash is operational and shouldnt be used to settle more long term obligations
Is it always accurate to add debt to enterprise value
most of the time yes, it is a common for a merging or acquiring company to settle the others long term obligations upon transaction. It also helps compare apples to apples b/w transactions
Why do you add preferred stock value to enterprise
Because you buy out these shareholders upon acquisition. They have higher claim to company assets than common shareholders and are therefore more similar to debt investors. By this logic they must be paid
How do you factor in convertible bonds to enterprise
You always pursue the outcome that is most fair for the bond holder. If the price of the converted stocks is in excess of the bond face value, you convert and settle (accounting wise this just means you convert the bonds as normal), shares are diluted. If they are out of the money then settle as debt.
Equity value vs shareholder equity
EV is market value, cant be negative
SE is the book value (issue price), can be negative
Do you use enterprise or equity value when using net income as a multiple
Net income incorporates interest expense, debt investors have therefore been compensated and remaining value goes solely to equity investors, use equity value
Do you use enterprise or equity value when using unlevered free cash flow multiples
Unlevered free cash flow is your cash flow adjusted net of the effects of interest expenses. It therefore represents a value available to both equity and debt investors alike. Enterprise value expresses value relating to both investor categories and is the proper value to use.
A company has 1mm shares outstanding at a value of $100/ share. There are also $10mm of convertible bonds with par value of $1,000 and conversion price of $50. How many diluted shares are outstanding.
- First recognize definitions.
Par value -> bond face value
Conversion price -> minimum share price to convert - Shares are in the money because $100/share > $50 conversion price
- How many bonds are there? 10 000 000 / 1000 = 10 000
- A bond is $1000, conversion price is $50, yielding 20 shares each. 10 000 x 20 = 200 000.
- We have 1.2mm shares now.
Note: this is actually easier because you just increase the amount of shares, no treasury involved.
