EV Flashcards
Equity Value
The value of ALL its Assets to EQUITY INVESTORS (i.e., common shareholders)
Enterprise Value
The value of assets related to CORE BUSINESS OPERATIONS to ALL INVESTORS (equity, debt, preferred)
How do you value a company?
2 main methodologies:
1) intrinsic valuation
DCF: Assign value to a company based on its ability to produce cash flow*quick run thru)
2)relative valuation
Precedent Transaction: assigns value to a company based on what similar companies have been bought and sold at in the past
CCA: assigns value to company based on what similar companies are being traded at on the open market - some common multiples used for arriving at a valuation is EV/ebitda, P/E
what’re some ways you can measure company’s value?
o The Company’s “Market Value” – What is the company worth right now according to the stock market, its current owners, or its current investors?
o The Company’s Implied or “Intrinsic” Value – What should the company be worth according to your analysis and views
Why can company’s market value be different from implied value?
you believe the company’s future growth is different from the market
How to move from equity value to enterprise value?
Subtract non core business assets (C,I) ) and add Liability & Equity items that represent other investor groups (debt, preferred, NCI)
Other investor groups to add:
unfunded pension obligations: company borrowed from employees to fund operations – (employees act as other investor group)
capital leases – debt to be paid,
None core business assets (ie.)
C, I, assets held for sale/ discontinued (net with liabilities from discontinued business), financial assets
Current vs Implied value (Public)
o Current Equity Value = s/o x price
o Current Enterprise Value = Subtract noncore business assets, add liability/ equity items rep. other investors
o Implied enterprise value = based on your assumptions (growth rate, discount rate)
o Implied equity value = add noncore business assets, subtract liability/ equity items rep.
Current vs Implied value (Private)
o 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
o 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
Why can current enterprise value be negative but not current equity value?
o Share price, count can’t be negative and also total assets can’t be negative
o Enterprise value can be negative. Ex: no debt and a lot of cash
How can IMPLIED Equity Value and IMPLIED Enterprise Value both be Negative?
o Enterprise value negative due to negative cash flows
o Therefore, implied equity value can be negative
Why, in theory, do financing events not affect enterprise value and may affect equity value?
• Cash changes, but then something on the L&E side of the Balance Sheet offsets the change so that Enterprise Value doesn’t change.
Why, irl, can financing events may affect enterprise value?
due to factors such as taxes, and changes in WACC due to changes in cap structure
What affects enterprise value?
Only changes to a company’s underlying business( winning customer contract, expansion) affect its Enterprise Value, but both financial and operational changes affect its Equity Value.
What is the appropriate numerator for a revenue multiple?
EBIT, EBITDA, unlevered cash flow, and revenue multiples all have enterprise value as the numerator because the denominator is an unlevered (pre-debt) measure of profitability. Conversely, EPS, after-tax cash flows, and book value of equity all have equity value as the numerator because the denominator is levered – or post-debt.
Types of and factoring dilution for Equity Value:
- TSM: applies to stock options. Assume option holder pays company to get new shares and company uses money to repurchase new shares.
• Exercise price < share price to be in-the-money
• Ie: share price:$20, 10 million shares and 1 million options, exercise price: $10
• Company receives 10 million, at 20$ it can buy back 500,000 shares
• Therefore diluted shares = 10.5 million shares - If-converted method: for convertible bonds (Employees can convert bond into shares. )
• 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.
• Ie: $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?”
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 - Straight-Up Addition: This one applies to restricted stock, restricted stock units (RSU -for employees and like normal shares but restrictions on when to buy/sell). You simply add these units to the company’s share count to calculate the diluted shares.
