ev Flashcards
Equity Value
The value of ALL its Assets, but only to EQUITY INVESTORS
Enterprise Value
The value of core business assets related to all investors(ie. Debt, equity preferred and possibly others)
2 ways you can measure a company’s value:
Current ( Market) Value – company worth right now according to the stock market
Implied (Intrinsic) Value – Company worth according to your analysis and views?
Why can a company’s Market Value be different from its Implied Value?
Because you believe the company’s future growth is different from the market
Move from equity value to enterprise value.
You subtract non-core-business Assets (cash, investments) and add Liability & Equity items that represent other investor groups (debt, preferred, NCI)
unfunded pension obligations & Capital leases
company borrows from employees to fund operations – (employees act as other investor group),
capital leases – debt to be paid,
what are non-core assets
assets held for sale/ discontinued (net with liabilities from discontinued business), financial assets
Calculate current equity value (public)
Current Equity Value = s/o x price
calculate current enterprise value (public)
Subtract noncore business assets, add liability/ equity items rep. other investors
calculate equity/enterprise value for private companies.
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
Can current equity value be negative?
No, Share price, count can’t be negative and also …total assets can’t be negative
Can current enterprise value be negative
Enterprise value can be negative. Ex: no debt and subtract cash
Can implied EV be negative?
o Enterprise value negative due to negative cash flows
o Therefore, implied equity value can be negative
How do Financing Events affect enterprise value
- 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
what affects enterprise value?
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.
IRL financing event affect may affect enterprise value
because of taxes, changes in WACC due to changes in cap structure
If the NUMERATOR – (EV) – includes the value of a Balance Sheet item, you should NOT include its corresponding income or expenses in the DENOMINATOR
why you exclude Interest Expense when you calculate a multiple such as EV / EBITDA or EV / EBIT: Enterprise Value already includes Debt
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
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).
If you use EBITDAR, the numerator – Enterprise Value – MUST reflect the Balance Sheet value associated with the Rental Expense
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.
Diluted Equity Value includes:
- Stock Options: Employees can exercise options and create new shares
- Convertible Bond: Employees can convert bond into shares
- RSU: for employees and like normal shares but restrictions on when to buy/sell
3 methods of factoring dilution
- TSM: applies to options and warrants. Assume option holder pays company to get new shares and company uses money to repurchase new shares.
- If-converted method: for convertible bonds
- 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.
TSM: share price:$20, 10 million shares and 1 million options, exercise price: $10
- Exercise price < share price to be in-the-money
- Company receives 10 million, at 20$ it can buy back 500,000 shares
- Therefore diluted shares = 10.5 million shares
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?”
• 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
Why might you subtract only part of a company’s Deferred Tax Assets (DTAs) when calculating Enterprise Value?
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.
.Why do you subtract Equity Investments, AKA Associate Companies, when moving from Equity Value to Enterprise Value?
First, they’re non-core-business Assets since the company could operate fine without them. You should, therefore, exclude them from Enterprise Value
Why do you add Noncontrolling Interests when moving from Equity Value to Enterprise Value?
First, these Noncontrolling Interests represent another investor group: Another company that the Parent Company owns a majority stake in.
