ev

Question 1

Equity Value

Answer 1

The value of ALL its Assets, but only to EQUITY INVESTORS

Question 2

Enterprise Value

Answer 2

The value of core business assets related to all investors(ie. Debt, equity preferred and possibly others)

Question 3

2 ways you can measure a company’s value:

Answer 3

Current ( Market) Value – company worth right now according to the stock market

Implied (Intrinsic) Value – Company worth according to your analysis and views?

Question 4

Why can a company’s Market Value be different from its Implied Value?

Answer 4

Because you believe the company’s future growth is different from the market

Question 5

Move from equity value to enterprise value.

Answer 5

You subtract non-core-business Assets (cash, investments) and add Liability & Equity items that represent other investor groups (debt, preferred, NCI)

Question 6

unfunded pension obligations & Capital leases

Answer 6

company borrows from employees to fund operations – (employees act as other investor group),
capital leases – debt to be paid,

Question 7

what are non-core assets

Answer 7

assets held for sale/ discontinued (net with liabilities from discontinued business), financial assets

Question 8

Calculate current equity value (public)

Answer 8

Current Equity Value = s/o x price

Question 9

calculate current enterprise value (public)

Answer 9

Subtract noncore business assets, add liability/ equity items rep. other investors

Question 10

calculate equity/enterprise value for private companies.

Answer 10

You have to rely on the valuation at which the company most recently raised money, the price at which it was most recently acquired, or some other external estimate to estimate its Current Equity Value
In practice, you often skip Current Equity Value and Current Enterprise Value for private companies altogether and just use your views to estimate the Implied Equity Value and Implied Enterprise Value

Question 11

Can current equity value be negative?

Answer 11

No, Share price, count can’t be negative and also …total assets can’t be negative

Question 12

Can current enterprise value be negative

Answer 12

Enterprise value can be negative. Ex: no debt and subtract cash

Question 13

Can implied EV be negative?

Answer 13

o Enterprise value negative due to negative cash flows

o Therefore, implied equity value can be negative

Question 14

How do Financing Events affect enterprise value

Answer 14

• Enterprise Value will NOT be affected by financing events
• Cash changes, but then something on the L&E side of the Balance Sheet offsets the change so that Enterprise Value doesn’t change

Question 15

what affects enterprise value?

Answer 15

changes only if the value of a company’s core business operations changes. Changes that improve the company’s expected future cash flow (winning customer contract, expansion, etc.)
• Only changes to a company’s underlying business affect its Enterprise Value, but both financial and operational changes affect its Equity Value.

Question 16

IRL financing event affect may affect enterprise value

Answer 16

because of taxes, changes in WACC due to changes in cap structure

Question 17

If the NUMERATOR – (EV) – includes the value of a Balance Sheet item, you should NOT include its corresponding income or expenses in the DENOMINATOR

Answer 17

why you exclude Interest Expense when you calculate a multiple such as EV / EBITDA or EV / EBIT: Enterprise Value already includes Debt

Question 18

If the company has Preferred Stock, this rule also explains why it’s so important to use Net Income to Common rather than Net Income

Answer 18

Equity Value does NOT include the Preferred Stock, so for the denominator, you should use a metric where the Preferred Dividends have been included (i.e., subtracted out).

Question 19

If you use EBITDAR, the numerator – Enterprise Value – MUST reflect the Balance Sheet value associated with the Rental Expense

Answer 19

But there is nothing on the Balance Sheet associated with a simple operating lease, so you have to capitalize the Rental Expense (usually using a simple rule, such as 7x or 8x the annual payment) and add it to Enterprise Value. The numerator becomes Enterprise Value + Capitalized Operating Leases.

Question 20

Diluted Equity Value includes:

Answer 20

1. Stock Options: Employees can exercise options and create new shares
2. Convertible Bond: Employees can convert bond into shares
3. RSU: for employees and like normal shares but restrictions on when to buy/sell

Question 21

3 methods of factoring dilution

Answer 21

1. TSM: applies to options and warrants. Assume option holder pays company to get new shares and company uses money to repurchase new shares.
2. If-converted method: for convertible bonds
3. Straight-up Addition: This one applies to restricted stock, restricted stock units (RSUs). You simply add these units to the company’s share count to calculate the diluted shares.

Question 22

TSM: share price:$20, 10 million shares and 1 million options, exercise price: $10

Answer 22

• Exercise price < share price to be in-the-money
• Company receives 10 million, at 20$ it can buy back 500,000 shares
• Therefore diluted shares = 10.5 million shares

Question 23

if-converted method:$200 million of convertible bonds with a par value of $1,000 per bond. The conversion price is $20.00, and the company’s current share price is $30.00. How many diluted shares get created by the convertible bond?”

Answer 23

• current share price exceeds the conversion price, then you assume that all the bonds convert into shares. If not, you assume nothing converts and you count all the convertible bonds as Debt instead.

i. Current share price> conversion price so count shares.
ii. 200 million/$1,000 = 200,000 bonds
iii. Conversion ratio = $1000/20 = 50
iv. Therefore, dilution = 50*200,000 = 10 million shares

Question 24

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

Answer 24

Deferred Tax Assets can contain many different items, some of which are related to simple timing differences or tax credits for operational items. But you should subtract ONLY the Net Operating Losses (NOLs) that are in the DTA because those are non-operational in nature.

Question 25

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

Answer 25

First, they’re non-core-business Assets since the company could operate fine without them. You should, therefore, exclude them from Enterprise Value

Question 26

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

Answer 26

First, these Noncontrolling Interests represent another investor group: Another company that the Parent Company owns a majority stake in.