EV

Question 1

What do Equity Value and Enterprise Value MEAN? Don’t explain how you calculate them - tell me what they mean!

Answer 1

Equity Value - Value of the company as whole (all assets) to only common equity investors

Enterprise Value - Value of company’s core operations (core assets) to all investors

Question 2

So why do you look at both of them? Isn’t Enterprise Value always more accurate?

Answer 2

There is no such thing as a better metric, they are different based on each different investor

EV-based multiples are beneficial because they are not affected company’s capital structure

Equity value is beneficial for common shareholders to see what a company’s value is by backing into its implied equity value and implied share price

Question 3

What’s the difference between Current Enterprise Value and Implied Enterprise Value?

Answer 3

Current enterprise value means the projected book value of the company while the implied value means the value for which you believe the company to be.

Current enterprise value can be measured by starting off with equity value, subtracting non-core assets, and adding liability and equity. But implied is a bit more complicated which required DCFs, comparable analysis, and precedent transactions.

Question 4

Why might a company’s Current Enterprise Value be different from its Implied Enterprise Value?

Answer 4

Company value will always equal to Cash Flow / (Discount Rate - Cash Flow Growth Rate)

Everyone agrees on the cash flow, but now everyone has the same discount rate or agrees on the same cash flow growth rate so that is why implied value is always going to vary.

Question 5

Everyone knows how you move from Equity Value to Enterprise Value. But WHY do you subtract Cash, add Debt, add Preferred Stock, and so on?

Answer 5

You subtract assets when they represent non-core assets and so cash and investments related to non-core and discontinued non-core assets fall into this.

You add liability and equity line items when they represent different investor groups beyond the common shareholders such as capital leases and unfunded pensions.

Question 6

Let’s say you’re about to buy a house using a $600K mortgage and a $200K down payment. What are the real-world analogies for Equity Value and Enterprise Value in this case?

Answer 6

The enterprise value in this case would be 800k and it only represents the house only; the core asset.

While the equity value of the house would represent only the 200k down payment with the tools, furniture, and anything along with it included in that value; non core assets.

Question 7

Can a company’s Equity Value ever be negative?

Answer 7

If it’s current equity value, there is no way for it to be negative because it is based on Shares Outstanding * Current Share Price and both of those figures on can’t be negative.

But implied equity value can be negative because it is based on what you assume those figures will be.

Question 8

Can a company’s Enterprise Value ever be negative?

Answer 8

Yes, a company might have more cash than its equity value and it has no debt so the figure will total up to be negative.

Question 9

Why do financing-related events such as issuing Dividends or raising Debt not affect Enterprise Value?

Answer 9

Because Issuing Dividends, issuing Stock, repurchasing Stock, issuing/repaying Debt, do not impact a company’s core business, so they do not affect Enterprise Value.

Question 10

Let’s say you determine a company’s Implied Value with the cash flow formula: Company Value = Cash Flow / (Discount Rate - Cash Flow Growth Rate). Will this give you a company’s Implied Equity Value or Implied Enterprise Value?

Answer 10

It depends on what metrics you use to determine it

If you are using metrics that are available to all investors then it would create enterprise value. Unlevered FCF or Free Cash Flow to Firm for the cash flow. And WACC for the discount rate.

If you are using metrics that are available to only equity investors then its equity value. Levered FCF or Free Cash Flow to Equity for cash flow and cost of equity for the discount rate.

Question 11

If financing-related events do not affect Enterprise Value, what DOES affect it?

Answer 11

Only core business changes so new customer contract, closing a factory, higher than expected sales.

Question 12

If a company wins a major contract with a new customer, will ONLY Enterprise Value change? Or will Equity Value also change?

Answer 12

Both will be affected. Enterprise will especially be affected but equity value will be affected by both operational and non-operational changes.

Question 13

Why does Enterprise Value NOT necessarily represent the “true cost” to acquire a company?

Answer 13

Because there are firstly other fees associated with purchasing; M&A and accounting costs.

And because the buyer doesn’t have to always repay the company’s debt, they can refinance the debt.

And lastly because the buyer doesn’t always get the entire cash balance of the company because some cash is needed in order for the company to continue to operate so enterprise value wouldn’t take into account of all of that.

Question 14

In theory, if Companies A and B are the same in all respects, but Company A is financed with 100% Equity, and Company B is financed with 50% Equity and 50% Debt, their Enterprise Values will be the same. Why is this NOT true in reality?

Answer 14

Because company’s capital structure will impact the way you implied enterprise value and the way you perceive the discount rate. The market would even adjust its discount rate and the current enterprise value will therefore be lowered.

The costs of percentages of debt, equity, preferred stock would change and so will its percentages. Debt can decrease initially, but it will increase past a certain point when the risk to all investors increases.

Although EV will less impacted than equity value by capital structure changes, there will be relatively small changes.

Question 15

A company issues $200 million in new shares. How do Equity Value, Enterprise Value, EV / EBITDA, and P / E change?

Answer 15

Equity value would go up by $200M because of the SHARES and so the P / E ratio that matches it would also go up.

Enterprise value not go up because the increase in cash, which is a negative for EV, would offset the new shares. And so the EV / EBITDA wouldn’t be changed either.

Question 16

A company issues $200 million in new shares, but it will use $100 million from the proceeds to issue Dividends to shareholders. How does everything change?

Answer 16

Equity Value would increase by only 100M because after the 200M shares is issued, it would decrease after the 100M dividends.

EV on the other hand wouldn’t change because the extra $100M would be offset by the higher equity value.

And so EV / EBITDA wouldn’t change, but P / E would.

Question 17

The company decides to use the $200 million to acquire another business for $100 million instead. How does everything change?

Answer 17

Equity value increases by 200M again and since it doesn’t distinguish between core and non core assets, the 100M in a business wouldn’t change it.

EV wouldn’t increase from the 200M but since the 100M is replacing the cash with a core asset, EV increases by 100M.

And both P / E and EV / EBITDA increase in this situation.

Question 18

What if the company uses the $100 million to acquire an Asset rather than an entire company?

Answer 18

Again the Equity Value would still increase by 200M no matter what type of asset it is.

BUT for EV it would depend on what type of asset it is; if its a factory purchase, then it increases by a 100M but if its short term investment then it wouldn’t change.

The P / E would increase by 200M but the EV / EBITDA would still depend if the asset is core or non-core.

Question 19

What changes with everything above if the company raises $200 million in Debt to do this instead?

Answer 19

Equity Value will not be affected by debt raising changes now that it is not equity based. So it wouldn’t increase by 200M anymore and it would actually decrease by 100M when dividends are issued since equity is going and cash are going down.

EV will still continue to be the same since cash and debt both cancel each other out, even when dividends are issued. It will only increase when the cash is used purchase a core-asset.

Question 20

Let’s say the company raises $200 million in Debt to acquire another company for a purchase price of $200 million. The other company’s Common Shareholders’ Equity is exactly $200 million. How does everything change?

Answer 20

Neither EV and Equity Value would increase at first from the debt raised.

After the purchase, EV would increase by 200M since the purchase is a core asset. While Equity Value wouldn’t change since the cash (an asset), would be exchanged for the company (another asset) cancelling each other out.

So P / E would stay the same while EV / EBITDA increases

Question 21

How is this scenario different if the purchase price is still $200 million, but the other company has only $100 million in Common Shareholders’ Equity?

Answer 21

Only change would be now there would be 100M in Goodwill that needs to be written down on the balance sheet.

EV would still increase by 200M since Goodwill is a core asset and Equity Value would continue to stay the same.

Question 22

What happens to everything if a company issues $100 in Dividends?

Answer 22

Equity Value would go down by a 100M since cash and equity is both going down. EV would stay the same since cash and lower equity cancel each other out.

So P / E would go down and EV / EBITDA would be unchanged.

Question 23

A company has a Current Equity Value of $200, $50 in Cash, and $100 in Debt. If the company spends $25 of its Cash balance to purchase PP&E, how does everything change?

Answer 23

So after adding everything up 200 - 50 + 100 enterprise value is 250 and spending 25 for a core asset will increase EV to 275.

Equity Value will be unchanged because the type of asset doesn’t matter to it.

So with the 25 taking into effect P / E will stay the same while EV / EBITDA increases.

Question 24

A company has excess Cash. What are the valuation implications if it uses that Cash to repurchase shares vs. repay Debt?

Answer 24

In both cases EV and EV / EBITDA would stay the same since cash is offsetting the equity value or its reducing the debt balance.

But for Equity Value, if shares are repurchased, the equity value would go down and so will the P / E. But it would stay the same if debt was repaid.

Question 25

A CEO finds $100 of Cash on the street and adds it to the company's bank account. How do Equity Value and Enterprise Value change?

Answer 25

Equity Value will increase by 100 since it represents what the company saved up internally from its operations and it belongs to some type of equity group. Enterprise Value would not change because cash would offset that higher equity value.

Question 26

A company issues a press release indicating that it expects its revenue to grow at 20% rather than its previous estimate of 10%. How does everything change?

Answer 26

This being a core asset, both EV and Equity Value would increase because the assets are now valued more because it expects to generate more revenue.

Question 27

When there's an operational change, how can you determine whether Equity Value or Enterprise Value will change by more?

Answer 27

Enterprise Value is mainly dependent on these operational changes so it would change more than Equity Value would which is more dependent on both financial and operational changes.

Question 28

Will operational changes impact a company's Current or Implied Enterprise Value by more?

Answer 28

When operational changes occur, implied EV will impacted more because it is based on your views and you are able to change and revise your calculations immediately. While current EV, the market, tends to take time to reflect the changes on the company.

Question 29

You've explained that Equity Value represents the value of ALL assets. If that's the case, why doesn't a Debt issuance boost Equity Value? After all, if a company raises $100 in Debt, it gets $100 in extra Cash.

Answer 29

Equity Value is the value of all assets to only equity investors so debt investors are not included in this calculation, not even the cash that is gained from it.

Question 30

What IS a valuation multiple?

Answer 30

It is basically short for a company's value based on its cash flows, cash flow growth rate, and discount rate. You would normally value this as Company value = Cash Flow / (Discount Rate - Cash Flow Growth Rate) So instead of doing all of that information, they use numbers like 10x to explain it in a simple way. You can think of these valuations similar to when you are buying a house and you need to know if the house is overvalued or not so you use per-square-foot to compare it to what you perceive the value of the home to be.

Question 31

A company trades at a valuation multiple of 13x EV/EBITDA (based on its Current Enterprise Value). What does that mean?

Answer 31

This number by itself means nothing. You need to be able to compare it to other companies multiples to be able to determine what it means. If other similar companies are valued at 10x, this means the company is overvalued but other companies are 16x then it means the company is undervalued. At the end of the day, multiples point you towards the right direction solving an investigation but it doesn't solve the mystery entirely.

Question 32

How can you use valuation multiples in real life?

Answer 32

It is commonly used to compare a company to similar companies, using something called Comparable Company Analysis. But valuation multiples can also be used to determine a company's yield. For example, if a company has a P / E of 10x it means you will earn 10% for each dollar you invest. And lastly, it can be used to determine a company's implied FCF growth rate - the rate at which the market expects it to grow. Long story short - if a company's EV / EBITDA is 12x, assuming the EV is 12000 and EBITDA is 1000. Its Unlevered FCF is 500 and the Discount Rate is 10%. Then plugging it into the company value formula we can determine the missing variable. Company Value = Cash Flow / (Discount Rate - Cash Flow Growth Rate) 12000 = 500 / (10% - FCF Growth Rate) Which solves to FCF Growth Rate = 5.8% - you might compare this market view on the rate with your views on the company's growth rate to if the company might be over/under valued.

Question 33

Suppose that you graph the EV / EBITDA multiples for a set of similar companies along with the revenue growth rates, EBITDA margins, and EBITDA growth rates. Which operational metric will MOST LIKELY have the strongest correlation with the EV / EBITDA multiples?

Answer 33

A company's value depends on its cash flow, cash flow growth rate, and discount rate. Although revenue still has correlation with EV/EBITDA multiples, the correlation is much stronger with EBITDA growth rates, and it is closer to cash flow growth. But it would have been a different case if it was about EV / Revenue multiples instead. And of course, EBITDA margins wouldn't make much of a difference unless they are changing margins.

Question 34

Despite this principle, why do valuation multiples and growth rates often NOT display as much correlation as you might expect?

Answer 34

EBITDA growth and FCF growth are very different since FCF includes taxes, Change in Working Capital, and the full CapEx amount, whereas EBITDA doesn't which can be very beneficial. And Company Valuation is based on cash flow growth, so growth rates in revenue, EBITDA, EBIT, and net come are the best rough approximations of cash flow growth. And not every comparable analysis necessarily has the same discount rate since different companies have different risk levels. And lastly, a lot of non-financial factors could affect multiples for example when companies report legal troubles, a new product development, a new CEO.

Question 35

You're valuing a mid-sized manufacturing company, and you're comparing it to peer companies in the same industry. This company's EV / EBITDA multiple is 15x, and the median EV / EBITDA for the comparable companies is 10x. What's the MOST likely explanation?

Answer 35

Well there could be different explanations; new CEO, recent positive news, product introduction, etc. But the most probable case is that the market expects the company's cash flow to grow more quickly than those of other companies. Let's just it was expected to grow at 5%, now its expected to grow at 10. Because these companies are in the same industry and are comparable, it is unlikely that the discount rate - the risk would be different.

Question 36

Would you rather buy a company trading at a 15x EV / EBITDA multiple, or one trading at a 10x multiple?

Answer 36

It really depends on how the company compares to peer companies. If they are usually at 20-25x then it would be cheap to buy 15x but it would be expensive if it the average was 5x. The point is you want to buy companies that undervalued so you can sell it for a higher price in the future.

Question 37

Could a valuation multiple such as P / E or EV / EBITDA ever be negative? What would it mean?

Answer 37

Any valuation multiple can always be negative except for revenue based ones. If a company has a negative Net Income or EBITDA, the multiples will be negative. This means that these multiples in this industry might not be useful so you will have to use other multiples or methodologies to value the company.

Question 38

If a company has both Debt and Preferred Stock, why is it NOT valid to use Net Income rather than Net Income to Common when calculating its P / E multiple?

Answer 38

You can't use halfway multiples that are halfway Enterprise Value and then the denominator is fully equity value. You would have to add Preferred Stock to Equity Value to match everything but then people would be confused who see this in your analysis. So, it is best to stick to proper and simple multiple rules and stick to Net Income to Common in this case.

Question 39

If a company's cash flow matters most, why do you use metrics like EBIT and EBITDA in valuation multiples rather than CFO or FCF?

Answer 39

Mostly its for convenience since you need to look at the cashflow statement to determine the CFO or CFO whereas EBIT and EBITDA is a simple income statement calculation. There are also different line items in CFO and FCF that vary between companies; Deferred Taxes, Stock-Based Compensation, Change in Working Capital. So this makes it difficult to create meaningful comparisons.

Question 40

What are the advantages and disadvantages of EV / EBITDA vs. EV / EBIT vs. P / E?

Answer 40

First off, there is not such thing as a better valuation, you need to look a variety of multiples and methodologies as well as the bigger picture to determine the value of the company. But if I had to pinpoint the main aspects of them. Comparing EV / EBITDA to EV / EBIT, EV / EBITDA is better in situations where you want to completely exclude the company's CapEx, depreciation, and capital structure. But EV / EBIT would be better in industries where you want to exlclude the capital structure but partially factor in CapEx and depreciation such as manufacturing where these factors are a key driver. P / E multiple isn't so much useful in most cases because its affected by different tax rates, capital structures, etc so its used to ensure all the common multiples are covered. But it is sometimes important in certain industries like commercial bank and insurance firms where you do want to factor in the interest income and expense.

Question 41

What are the advantages and disadvantages of FCF vs. Unlevered FCF vs. Levered FCF?

Answer 41

Unlevered FCF is capital structure-neutral so a company's cash flow will be the same regardless of its Cash, Debt, and Preferred Stock. Its also easier and faster to calculate than others. You'd use FCF if you want to take into account company's capital structure and you would use Levered FCF if you want to be mor accurate and take into account the mandatory Debt Payments but no one really agrees on how to properly calculate it. You mostly use Unlevered FCF in a DCF analysis to value a company; FCF is for more standalone financial statement analysis; and Levered FCF is very rare to use because of how unreliable and hard for it to be setup.

Question 42

When you use EBITDAR in the EV / EBITDAR multiple, how must you adjust Enterprise Value?

Answer 42

So since EBITDAR adds rental expense and it would exclude that in the numerator, you have to add it back by capitalizing on the company's operating leases by multiplying the annual lease expense by usually 7 or 8 times then adding it to EV. This is because there is no Balance Sheet item for rental expense and so sometimes in these situations you have to create new Balance Sheet items to compensate for changes on the other side of a multiple.

Question 43

Could Levered FCF ever be higher than Unlevered FCF?

Answer 43

Although it is highly unusual, yes it can happen. Levered Free Cash Flow includes Net Interest Expense and so if a company has a negative number in that, meaning that they had more Interest Income than Interest Expense and also had low Debt Repayments, than Levered FCF would be higher than Unlevered FCF.

Question 44

If EBITDA decreases, how do Unlevered and Levered FCF change?

Answer 44

So because EBITDA basically only includes revenue, COGS, and Operating Expenses, and levered and unlevered FCF has those items and more. The decrease in EBITDA could mean that either the revenue is lower or the COGS or Operating Expenses are higher. And if any of those happen, Levered and Unlevered FCF would be lower since the Operating Income that flows into them would be lower.

Question 45

What are some different ways you can calculate Unlevered FCF?

Answer 45

1st Method: EBIT x tax rate + non-cash adjustments and changes in working capital from CFS - CapEx 2nd Method: (EBITDA - D&A) x tax rate + non-cash adjustments and changes in working capital from CFS - CapEx 3rd Method: CFO - (net interest expense and other items between operating income and pre-tax income) x tax rate - CapEx

Question 46

When you calculate Unlevered FCF starting with EBIT * (1 - Tax Rate), or NOPAT, you're not counting the tax shield from the interest expense. Isn't that incorrect?

Answer 46

No it would be correct because if you wanted to exclude the company's capital structure, you have to exclude everything including the interest. The tax savings from the interest expense does not exist if there isn't any interest expense so why would you include it? If you did include it then it would turn into FCF rather than Unlevered FCF.

Question 47

Could a company's EV / EBITDA multiple ever equal its P / E multiple?

Answer 47

Hypothetically, it could because EBITDA, EV, Equity Value, and Net Income can all be any number really. IF EV is 100, EBITDA is 10, Equity Value is 50, and Net Income is 5, then EV / EBITDA and P / E will be 10x. But realistically P / E multiples tend to be higher than EV / EBITDA because the gap between Net Income and EBITDA is far greater than the gap between Equity Value and EV.

Question 48

Two companies have the same P / E multiples but different EV / EBITDA multiples. How can you tell which one has more Debt?

Answer 48

So this is a very tricky question without having more details about the EV / EBITDA. You can't answer this question this question because the two companies can be completely different sizes For instance, if they both a P / E multiple of 15x but one has company has 10 dollars of Net Income and the other one has a 100, then the company that is bigger likely has more debt even if its EV / EBITDA is lower. Even if they had the same Equity Value, there are still other line items you have to factor in like what if the company with a higher EV / EBITDA simply just has less cash but the exact same debt as the other company. At the end of the day aside from this being a difficult question to answer without looking at the bigger picture of the company, multiples are like an indicator on the cluster of your car. Just because the check engine light is on doesn't mean you need a new engine soon.

Question 49

How do you decide whether to use Equity Value or Enterprise Value when you create valuation multiples?

Answer 49

You decide on which metric it is by looking at which type of investors this metric is going to feed. Is it going to all the investors in the company debt, preferred, and equity or is it just common equity investors? If its common equity then go with Equity Value; if its all investors then go with all investors. But one really good determinant to know which one to use is Net Interest Expense. If the metric you are looking for includes Net Interest Expense then use Equity Value, if not then use EV. Also, if the valuation multiple is based on non-financial metrics like unique users or subscribers then you should use EV as those metrics benefit all investors.

Question 50

Should you use Equity Value or Enterprise Value with Free Cash Flow?

Answer 50

It depends on the type of FCF. You should use Levered FCF and FCF for Equity Value because it includes Net Interest Expense. And you should use Unlevered FCF for EV because it does not include Net Interest Expense.

Question 51

Two companies have the same amount of Debt, but one company has Convertible Debt, and the other has traditional Debt. Both companies have the same Operating Income, Tax Rate, and Equity Value. Which company will have a higher P / E multiple?

Answer 51

Since convertible bonds have lower interest rates than normal debt loans, the company with convertible debt will therefore have higher net income. And as a result, the P / E becomes lower which is better for investors while the company with normal debt have a higher P / E.

Question 52

A company is currently trading at 10x EV / EBITDA. It wants to sell an Asset for 2x the Asset's EBITDA. Will that sale increase or decrease the company's Enterprise Value?

Answer 52

It depends on the type of asset it is, if its a core business asset, then the sale will reduce EV because you are exchanging it for cash which is a non-core asset. But if it is not a core-asset than it will have no effect. But even though EV decreases in the first case, EV / EBITDA will actually increase. If EBITDA was a $100, the asset was 20 of the EBITDA and the EV was 1000. After the sale the asset became 40 and the EV fell to 960 and EBITDA to 80 so now EV / EBITDA = 960 / 80 equals to 12x. This is why companies often sell underperforming companies so they can quickly boost their valuation multiples and increase the stock price.

Question 53

Is it accurate to subtract 100% of the Cash balance when moving from Equity Value to Enterprise Value?

Answer 53

No, cash is a non-core asset but there is always a minimal amount of cash that is needed to operate a business. But this is difficult to get a number because companies don't disclose it, so firms typically just subtract it all off.

Question 54

A company has 10,000 shares outstanding and a current share price of $20.00. It has 100 options outstanding at an exercise price of $10.00. It also has 50 Restricted Stock Units (RSUs) outstanding. Finally, it also has 100 convertible bonds outstanding at a conversion price of $10.00 and par value of $100. What is its Diluted Equity Value?

Answer 54

Every price has been exercised. So lets start off with the options. It has a 100 options x the exercise price of 10 = $1000. So this means 1000 was given to the company and after it calculates what it actually owes them 20 x 100 options = 2000, it now has to pay 1000 which converts to 50 new shares outstanding. Moving on to RSU that is simply going to be added to share count outstanding. And on to convertible bonds, there is already a hundred bonds outstanding so all we have to do is calculate the new share per pond by dividing the par value by the conversion price which is 100/10 = 10 new shares. Then you multiply it by the hundred convertible bonds outstanding which now becomes 1000 new shares outstanding. And after adding all the shares up you get 11,100 which you multiple by the 20 share price which get you $222,000 in diluted equity value.

Question 55

Why do you NOT subtract Goodwill when moving from Equity Value to Enterprise Value? The company doesn't need it to continue operating its business.

Answer 55

Because goodwill is a core-business asset. Goodwill reflects the premiums paid for companies that the company previously acquired and these acquisitions are part of the company's core business.

Question 56

A company has 1 million shares outstanding, and its current share price is $100.00. It also has $10 million of convertible bonds, with a par value of $1,000 and a conversion price of $50.00. What are its diluted shares outstanding?

Answer 56

So because the companies share price went above the strike price, we have to divide convertible bonds by the par value. So $10m/1000 = 10000 convertible bonds Then we have to divide the par value by the conversion price which is 1000/50 = 20 shares per bond. Then we multiple the shares per bond and the convertible ponds which get us 20 x 10000 = 200000 new shares which adds to the 1 million shares mentioned earlier totaling to 1.2M.

Question 57

Why might you subtract only part of a company's Deferred Tax Assets (DTAs) when calculating Enterprise Value?

Answer 57

Deferred Tax Assets have a lot of different line items, some of them are just simple timing differences or tax credits on operational items. So you should only subtract the Net Operating Losses because they are not going to continue operating so it wouldn't make sense to keep them.

Question 58

Why might you subtract only part of a company's Deferred Tax Assets (DTAs) when calculating Enterprise Value?

Answer 58

Deferred Tax Assets have a lot of different line items, some of them are just simple timing differences or tax credits on operational items. So you should only subtract the Net Operating Losses because they are not going to continue operating so it wouldn't make sense to keep them.

Question 59

Why might someone argue that you should NOT add capital leases when moving from Equity Value to Enterprise Value?

Answer 59

Some may argue that capital leases are operational items, and they are not a financial decision. They are rather looked at as a operational liability that does not represent another investor group. But realistically leases are financial in nature, and they are similar to debt, being that it is a non-cancellable contract with fixed payments. And that is how firms view it, capitalizing on operating leases.

Question 60

A company has 100 shares outstanding, and its current share price is $10.00. It also has 10 options outstanding at an exercise price of $15.00. What is its Diluted Equity Value?

Answer 60

This one is simply $1000 since 100 shares x $10 is 1000 and because the exercise price for the other shares have not met the price to be executable yet.

Question 61

How do you factor in Working Capital when moving from Equity Value to Enterprise Value?

Answer 61

There is no need in removing Working Capital items as there are core-business assets within that calculation. You would only subtract non-core items. The assets in Working Capital all count as core business asset (inventory, AR, prepaid expenses). And the liabilities that it subtracts in the equation already exclude lines that doesn't include investor groups (accrued expenses, deferred revenue).

Question 62

Why do you subtract Equity Investments, AKA Associate Companies, when moving from Equity Value to Enterprise Value?

Answer 62

Well firstly, it not a core-business asset. Secondly, EBIT and EBITDA metrics wouldn't include any equity investments. From a comparability standpoint, it wouldn't make sense to have the denominator or numerator of EV to be uneven.

Question 63

If a company has $10,000 in convertible bonds with a par value of $2,000 and a conversion price of $20.00, how many diluted shares will there be?

Answer 63

There isn't enough information for me to answer that question. I would need to know the company share price.

Question 64

Why do you add Noncontrolling Interests when moving from Equity Value to Enterprise Value?

Answer 64

Noncontrolling Interests are basically anything that is over 50% share that the company owns of another company. And if the company owns this subsidiary, its financial statements will consolidate with it. So metrics like revenue, EBIT, and EBITDA already count in this majority stake. The problem is that Equity Value includes only the value of the actual percentage the Parent company owns which is that 50-70% so you have to add the portion that the company doesn't own - the Noncontrolling Interest. This way Enterprise Value metrics are not half way and EBITDA and EV are fully matched on both sides.

Question 65

This same company also has Cash of $10,000, Debt of $30,000, and Noncontrolling Interests of $15,000. What is its Enterprise Value?

Answer 65

222,000 - 10000 + 30000 + 15000 = 257000