Equity / Enterprise Value Flashcards
What is Company Value
Cash Flow / (Discount Rate - Cash Flow Growth Rate)
What is the main reason why Market and Intrinsic values often differ?
Often investors disagree on future growth prospects of the company based on historic analysis, as well as disagreeing on discount rate and cash flow.
What is Equity Value?
The value of everything (operating and financing - total assets) that is attributable to Equity Investors.
What is Enterprise Value?
The value of the company’s core business operations attributable to all investors in the company.
What does Enterprise Value exclude that equity value includes?
Non-operating Assets, such as Cash and Financial Investments, as well as Non-Operating Liabilities such as Debt.
What happens to Equity Value and Enterprise Value when a company changes its capital structure?
Equity value will change because equity value is dependent on capital structure (interest payments and debt repayments) whereas Enterprise value is capital structure independent.
Why pair equity value with Total Assets / Liabilities?
A company can generate equity internally from Net Income but also it can raise equity by issuing stock.
Similarly, a company cannot generate debt or preferred stock internally and must ask outside investors.
Moreover a company is unlikely to finance non-core operations using debt or preferred stock proceeds yet may be able to use internally generated proceeds for non-core operations.
What is another definition for Enterprise Value?
Enterprise Value =
Equity Value - non-operating Assets + Liability and Equity items that represent other investor groups
What are some examples of non-operating Assets?
An asset is non-operating if the company does not need it to sell product/services and deliver them to customers.
Financial Investments Owned Properties Side Businesses Assets Held For Sale / Discontinued Operations Equity Investments / Associate Companies Net Operating Losses
What are some examples of Liability and Equity items that represent other investors?
Capital Leases - debt-like obligations with interest payments (for PPE)
Non-controlling Interests - unowned portions of majority owned companies.
Unfunded Pensions - defined benefits pension - Pension Assets and Pension Liabilities accounts. If liabilities exceed assets, the pension is unfunded and only that portion should be added to the Enterprise Value bridge.
Potentially Operating Leases: 2019 brought new accounting rules for operating leases and on-Balance Sheet items.
How do you calculate valuations for Private Companies?
You have to rely on the valuation at which the company most recently raised money (or price it was acquired) or another external company to estimate its Current Equity Value.
How do Financing events affect enterprise value?
According to the Modigliani-Miller theorem, financing events don’t affect Enterprise value, such as:
Issuing debt: Cash and Debt both increase and offset each other
Repaying Debt: Cash and Debt both decrease and offset each other
Issuing Stock: Cash and Equity Value both increase and offset each other
Repurchasing Shares: Cash and Equity value both decrease and offset each other
Dividends: Cash and Equity both decrease and offset each other
What is a rule of thumb to see whether enterprise value changes?
Enterprise value only changes if a company’s Net Operating Assets (CORE BUSINESS OPERATIONS) change.
What are examples of Core Business Operations?
PPE increases: PPE is an operating asset so Net Operating Assets increases, Enterprise value increases
Inventory increases: Inventory is an operating asset so NOA increases, TEV increases
Accounts Receivables Decreases (Cash collection) so operating assets decrease so NOA decreases and TEV decreases
Deferred Revenue increases: this is an operating liability so Net Operating Assets decrease and Enterprise Value decreases.
How do we know if Equity Value changes?
Equity value changes only if Common Shareholder’s Equity Changes - both CSE and Equity Value change by the same amount.
Can a company’s current equity value or enterprise value be negative?
Market Equity value cannot be negative as it is share price x Share Count
Current Enterprise Value can be negative (Current Equity Value = $100, Debt = 0, Cash = $200)
Scenario is rare but it is common for pre-bankruptcy companies that are burning through cash at high rates and likely to die soon. It let’s one buy cash at discounts.
Can implied equity and enterprise value be negative?
Yes both can.
Consider a DCF where UFCF = -$100. Wacc is 3% and growth rate is 2%
Implied enterprise value is -$10,000.
If the company has $500 of cash and no debt, Equity Value will also be negative.
This is theoretically possible but unlikely unless you’re analyzing a highly distressed company or highly speculative company.
Is enterprise value the cost to acquire a company?
No, it is the value of the company’s core business operations to all investors.
At minimum, a buyer must pay for ALL shares outstanding. Then, most debt is refinanced (replaced or completely repaid) and then some debt-like items may not be included.
Lastly, acquirer may have to pay deal fees for the acquisition that isn’t reflected in the Enterprise value at all.
Is Enterprise value the true value of a company?
It depends to whom.
It is the true value to all investors in aggregate for any individual it is not. (Think having a mortgage - do you receive the whole selling price or do you have to repay your mortgage and only receive back the remaining equity stake)
Does Debt add to Enterprise Value or Cash subtract from it?
NO.
Debt does not add to Enterprise value. Debt is added from Equity Value when moving to Enterprise Value.
You similarly subtract cash from Equity Value to get to its Enterprise Value.
If a company has excess cash, why doesn’t it just repay its debt?
For two reasons:
First, debt interest acts as a tax shield and thus increases net income / bottom line.
Secondly, many forms of debt do not allow early repayment.
A company issues $100 in Common stock and does nothing with it.
1) Equity value increases by $100 since CSE increases
2) NOA does not change so TEV does not change
A company issues $100 in Common stock and issues $50 of dividends with it.
1) Equity value increases by $(100-50) = $50 since CSE increases by the delta
2) NOA does not change since only cash, non-operating asset increases by $50. TEV does not change
A company issues $100 in Common stock and acquires a $100 company
1) Equity value increases by $100 as you increase Common Shareholders Equity
2) TEV increases $100 as you add in an operating asset of $100 .