Equity Value & Enterprise Value - BIWS Flashcards
How is enterprise value calculated?
Enterprise value - equity value + debt + preferred stock + noncontrolling interests - cash & cash equivalents
what are dilutive securities?
Dilutive securities are financial instruments—usually stock options, warrants, convertible bonds—which increase the number of common shares if exercised; this then reduces, or “dilutes”, the basic EPS (earnings per share).
How are diluted shares calculated
Treasury stock method
Why would you subtract an item when calculative enterprise value (from equity value)?
Normally when it saves you money or potentially gives you extra cash
Why would you add an item when calculating enterprise value?
When it represents something that must be paid immediately upon acquisition, like debt… or when it has to be repaid in the future (ie. unfunded pension obligations). or when you’re adding it back for comparability
What are examples of items that would be subtracted or added from enterprise value?
Subtracted: Cash (it saves you money right away), equity investments, net operating losses (can save cash as future tax deductions)
Added: Debt, the acquirer usually has to pay upon acquisition. Preferred stock: similar to debt because of required dividends which act as an interest expense
What is an item that would be added back to enterprise value for comparability purposes?
Non-Controlling interests: add these because when you own over 50% of another company, you consolidate 100% of its financial statements with your own… But equity value only represents the percentage that you own.
What are the scenarios where you would want to use equity value vs. enterprise value?
If considering interest income and expenses, equity value… if not, enterprise value.
so key metrics: Enterprise Value / Revenue EV / EBIT EV / EBITDA Equity Value / Net Income (EPS) EV / FCFF Equity Value / FCFE
why do we consider both equity value and enterprise value?
Enterprise value represents the value of the company that is attributable to all investors; equity value only represents the portion available to shareholders (equity investors).
How do you use enterprise value and equity value differently?
They’re used differently depending on the valuation multiple you’re calculating. If the denominator of the multiple includes interest income and expense (ie. net income) we use equity value… otherwise (like ebitda) we use enterprise value
How do you calculate diluted shares and diluted equity value? and why?
Basic share count and add the dilutive effect of stock options and any other dilutive securities. Treasury stock method is used for this. More accurately shows the cost of acquiring a company.
Could a company have a negative enterprise value? what would that mean?
Yes - it means the company has an extremely large cash balance, or an extremely low market cap. Often seen with companies close to bankruptcy or companies with enormous cash balances.
Why do we add preferred stock to enterprise value?
Preferred stock pays out a fixed dividend, and preferred shareholders also have a higher claim on assets than equity investors. As a result, it is more similar to debt than stock… So paid out in an acquisition scenario similar to debt.
What’s the difference between equity value and shareholder’s equity?
Equity value is market value while shareholders equity is book value. SE can be negative, Equity value can’t.
Should you use enterprise value or equity value with net income when calculating valuation multiples?
since net income includes the impact of interest income and expense, you always use equity value
