Financial Edge - Valuation Principles Flashcards
How to calculate equity value?
Difference between market cap and book value; however, usually refers to market cap
Share price * dilutes shares outstanding
Should you use the weighted average shares outstanding or the share count at the end of the period?
At the end of the period, because you want the latest available information
What is the equity to enterprise value bridge
Enterprise value = Equity value + Financial debt - Cash + Preferred shares + Minority interest + unfunded pensions - equity investments
Is enterprise value affected by financing decisions? What about equity value?
EV no, equity value yes
Why do you not truly own the business if you just pay the equity value?
You can’t determine financing structure unless you repay the debt
Why might it be preferable to look at EV / EBITDA rather than EV / EBIT?
EBITDA is closer to cash and reduces accounting differences and M&A accounting issues
When might you use EV / revenue?
When a business is not yet profitable
When would you use price / book to value a company?
When a company is balance sheet driven i.e. uses its balance sheet to make money
How will high levels of debt affect the P/E ratio?
High levels of debt will lead to much lower P/E because it is much riskier to be an equity holder, as well as the interest expense reducing the net income available to distribute to shareholders
How does debt affect EV multiples?
Theoretically, EV is independent of capital structure because the multiples are before considering interest expense and income
How does a higher ROIC affect enterprise value?
Higher ROIC means higher enterprise value, all else equal
