Equity value to Enterprise value

Question 1

why do we use enterprise value and equity value, whats the difference?

Answer 1

1. Equity value = shares outstanding * share price
2. Enterprise value = equity value + debt - cash + minority interest _ preferred stock
3. equity value only for equity shareholders, whereas EV takes into account of debt investors too
4. EV is a more comprehensive value of the company looking at its equity and debt side

Question 2

When looking at an acquisition of a company, do you pay more attention to Enterprise or Equity Value?

Answer 2

1. EV, because its how much the acquirer actually pays
2. it includes debt, equity, cash and other items which give a more comprehensive value on how much a company is actually worth

Question 3

What’s the formula for Enterprise Value and Equity Value

Answer 3

1. EV = Equity Value + debt - cash + minority interest + preferred shares
2. Equity Value (market cap) = shares outstanding * share price

Question 4

Why do you need to add Minority Interest to Enterprise Value?

Answer 4

1. minority interest is the non-controlling interest of a subsidiary company which is not owned by the parent company
2. Enterprise Value accounts for this as its financials include all of the subsidiary’s financials both minority interest + the part it owns.
3. Equity Value only accounts for the part the company has
4. therefore for a more fair comparison of equity and EV when they are used you need to add minority interest to Equity value, to bridge the gap
5. so when using multiples, the numerator and denominator both reflect 100% of the subsidiary company

Question 5

How do you calculate fully diluted shares?

Answer 5

1. use treasury stock method
2. take basic share count and add the dilutive effect of the preferred stock or convertible bonds or options

Question 6

what is par value and conversion price of a convertible bond

Answer 6

1. par value is the face value of a bond = how much it is worth or how much it was issued for when it is due
2. conversion price = if you converted this convertible bond to a share, how much you can sell it for

Question 7

Why do you subtract cash in the formula for Enterprise Value? what is the official reason and Is that always accurate?

Answer 7

1. official reason: Cash is subtracted because it’s considered a non-operating asset and because Equity Value implicitly accounts for it
2. not always correct, because technically you should be subtracting only excess cash – the amount of cash a company has above the minimum cash it requires to operate.

Question 8

what is the actual reason for why we subtract cash from EV?

Answer 8

1. because essentially when you buy the company you are paying for its debt
2. and debt can be paid with the cash, so essentially part of it can be offset by its cash ‘ or be paid with its cash’
3. not always true bcuz some cash is required for minimum to operate

Question 9

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

Answer 9

1. yes, basically, because as an acquirer you would be expected to pay back its debt
2. unless you dont expect to pay the debt back, which would be rare

Question 10

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

Answer 10

1. essentialy means that its cash reserves&raquo_space;» than its equity value + debt , OR it has a very low market cap
2. so either its a bank which has a lot of cash for product purposes
3. or because its going bankrupt

Question 11

Could a company have a negative Equity Value? What would that mean?

Answer 11

1. no, shares and share price cant be negative

Question 12

Why do we add Preferred Stock to get to Enterprise Value?

Answer 12

1. preferred stock is where you are obligated to pay a fixed dividend, seen as higher claim than equity investors
2. so treated more as debt

Question 13

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

Answer 13

1. depends if convertible bonds are in the money or out of the money
2. if conversion price is in the money then you would convert it to shares, and treat it that way
3. if it is out of the money you treated as debt for its par value

Question 14

what is in the money and out of the money

Answer 14

1. with options, or preferred stocks or convertible debt
2. if the excercise price or the conversion price is higher than the company’s current share price = out of money, and normally no incentive to convert it cuz your not making money
3. if its in the money you would convert it because you can sell it and make money.

Question 15

What’s the difference between Equity Value and Shareholders’ Equity?

Answer 15

1. shareholders equity is the book value of equity = it looks at how much will be paid to shareholders, whether assets can pay off liabilities
2. Equity value is market value of company, and CANNOT be negative
3. shareholders equity can be negative, equity value should exceed shareholder equity

Question 16

can shareholders equity be larger than equity value?

Answer 16

1. yes, if market looses confidence that the company will not do well, and that its assets are not as good as it appears, share prices can dip
2. i.e if on book, the assets look like they are worth a lot, however market doesnt believe that intangible assets are worth as much as they appear on books, it might lead to lower market cap than the books

Question 17

Are there any problems with the Enterprise Value formula you just gave me?

Answer 17

1. yes, it doesnt include everything
2. so Long term investments and equity investments can be treated as cash,
3. capital leases (also require interest payment ) and pension obligations shoudl be treated as debt

Question 18

Should you use the book value or market value of each item when calculating Enterprise Value?

Answer 18

1. you should technicalloy use market value
2. but practically jmaybe difficult to find each item market value, so for the one sthat you cant find, just use book value

Question 19

What percentage dilution in Equity Value is “too high?”

Answer 19

1. no strict rule
2. but anything over 10% dilutionk, is usually too high

Question 20

why is it bad too have a high dilution or to over dilute?

Answer 20

1. it can cause dilution in the current shareholder’s ownership
2. cause lower EPS, may look bad on the company

Question 21

If a company raises $250 million in additional debt, how would its enterprise value change?

Answer 21

1. theoretically no change
2. but changes can occur due to cost offinancing, interest expense and financing fees