Equity Value Reading Flashcards
Enterprise Value Definition
The value of a company’s core business operations
to ALL the investors in the company
Market Value vs Intrinsic Value of a Company
Market Value - What is it worth right now? (Share price x shares outstanding)
Intrinsic Value - What should it be worth according to your views
Equity Value Definition (What is it on balance sheet?)
EVERYTHING a company has (i.e., ALL its Assets), but only to EQUITY INVESTORS (i.e., common shareholders)
All assets + Common shareholders side of equity portion of B/S
Enterprise Value
The value of the company’s CORE BUSINESS OPERATIONS (i.e., ONLY the Assets related to its core business), but to ALL INVESTORS (Equity, Debt, Preferred, and possibly others).
How to calculate equity value of publicly traded company?
Shares outstanding x share price
Move from Equity Value to Enterprise Value (Assets)
Equity Value: Core-business assets + non-core business assets
Enterprise Value: Core-business assets
Equity Value to Enterprise Value (Investors)
Equity Value only value to equity investors
Enterprise Value: Value to equity investors + Value to debt investors + Value to preferred investors
Move from Equity Value to Enterprise Value on Balance Sheet
Subtract non-core business assets (cash and investments), add debt liability, add preferred stock, add non controlling interests
Non core business assets
What you need to sell goods to a customer.
Cash and investments
Calculate Equity Value on Balance Sheet
All Assets + Common Stock Equity Portion
How can enterprise value be negative?
Equity value of $100 and cash of $200, and no debt and preferred stock - Strip away non core assets (cash)
What are you trying to calculate when looking for cash flow to all investors?
Enterprise value - Use WACC
If a company with an Equity Value of $1,000 and Enterprise Value of $1,200 issues $100 of
Stock, what happens to both metrics?
So, the company now has $100 in extra Assets, and those extra Assets were funded by Equity investors. As a result, Equity Value increases by $100.
Equity Value is $100 higher, but you subtract the extra $100 of Cash. There are no new, other investor groups to add. The changes cancel each other out, and Enterprise Value stays the same.
Move from Enterprise Value to Equity Value on BS
- Add back non core business assets (Cash / Short & Long Term Investments)
- Subtract debt
- Subtract preferred stock
Metrics that pair with Enterprise value
- Revenue
-Operating Income or EBIT
-Net Operating Profit After Taxes (NOPAT), defined as EBIT * (1 – Tax Rate)
EBITDA - Unlevered Free Cash Flow (UFCF) or Free Cash Flow to Firm (FCFF) – Cash flow that’s
available to ALL investors
Metrics that pair with Equity Value
- Net Income (or Net Income to Common if there are Preferred Dividends)
- Free Cash Flow (CFO – CapEx)
- Levered Free Cash Flow (CFO – CapEx – Mandatory Debt Repayments)
Why is cash not the opposite of debt?
Because most debt doesn’t allow for early repayment
If a metric reflects dividends and interest payments (subtracted), what metric should it be paired up with
Equity Value
Equity value does not include…
Debt and preferred stock