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Equity/ Enterprise Value > Key Rule #1- Basics > Flashcards

Key Rule #1- Basics Flashcards

1
Q

What are the 2 ways to value a company?

A

Current and implied values

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2
Q

What is the current value of a company?

A

What it’s worth right now

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3
Q

What is the implied value of a company?

A

What it should be worth according to analysis.

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4
Q

Why could implied and current values be different?

A
  • different growth rates
  • could refer to different investor groups who funded the co
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5
Q

What is enterprise value?

A

Value of a company/s net operating assets to all investors.

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6
Q

What is net operating assets otherwise known as?

A

Core business operations

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7
Q

What is the formula for net operating assets?

A

OA - OL

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8
Q

How do you calculate current TEV?

A

equity value - non-operating assets + l&e items that represent other investor groups

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9
Q

What are non-operating assets?

A

company doesn’t need that asset to sell and deliver products
and are excluded from TEV

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10
Q

What are some examples of non-operating assets?

A
  • cash
  • financial investments
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11
Q

What are examples of l&e items that represent other investor groups

A
  • debt
  • preferred stock
  • noncontrolling interests
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12
Q

What is equity value?

A

value of net assets attributable to equity

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13
Q

What is the formula for net assets?

A

Total Assets - Total Liability

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14
Q

What is net assets otherwise known as?

A

everything a company has

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15
Q

How do you calculate Current EV for a public company?

A

shares outstanding x current share price

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16
Q

How do you calculate Current EV for a private company?

A

valuation in last funding round

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17
Q

What happens to EqV if cap structure changes

A

EqV will change

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18
Q

What happens to TEV if cap structure changes?

A

won’t change as much or no change

19
Q

How do you find Current TEV?

A

the long formula

20
Q

How do you find implied TEV?

A

DCF/ Comps/ Precedent analysis

21
Q

How do you find EqV and TEV of a private company?

A

in practice, skip current and use implied everything

22
Q

Why use both TEV and EqV?

A
  • diff concepts
  • impt to diff types of investors
  • TEV not as affected by cap str changes as EqV
  • actions taken by 1 investor group affect the rest eg. raise debt -> affect risk and returns for common shareholders
23
Q

Why pair net assets w common shareholders in EqV?

A
  • CSE is generated internally via NI and externally (stock issuance)
  • co can use for both operating and non-operating assets
24
Q

Why pair net operating assets w TEV?

A
  • co raises funds via outside (eg. debt, preferred stock)
  • use to pay for OA rather than non-OA
25
Q

Difference between current and implied TEV?

A

C: what market thinks core biz is worth to all investors
I: what u think based on analysis

26
Q

Difference in how current and implied TEV are calculated?

A

C: long formula
Implied: DCF/ Precedent/ Comps

27
Q

What is shareholder equity?

A
  • accounting metric, book value
28
Q

What is the formula for shareholder equity?

A

total asset - total liab

29
Q

Equity value vs Shareholder equity

A

EqV: market valuation metric
Shareholder equity: accounting metric

30
Q

Why might Current TEV be different from Implied TEV?

A

disagree w market on discount rate

31
Q

Why do you minus cash, add debt add preferred stock when EqV -> TEV?

A
  • subtract Non-Operating assets b/c TEV only reflects net operating assets
  • add L&E line items that represent other investor groups beyond common shareholders b/c TEV represents all investors
32
Q

Can EqV be -ve?

A
  • current EqV can’t b/c how can the formula be -ve?
  • implied EqV can b/c use views to calculate eg. if implied TEV is 0, has more debt than cash.
33
Q

Can TEV ever be -ve?

A
  • Current: yes eg. if cash > EqV and no debt
  • Implied: yes
34
Q

Why do financing events such as paying dividends/ issuing debt not alter Current TEV?

A
  • current TEV changes only if Net Operating Assets changes
  • none of these change net operating assets so no change
35
Q

What affects current TEV?

A

changes to company’s net operating assets affect TEV eg. buy PPE

36
Q

Implied value of company formula [cash flow / (DR - cash flow growth rate)]

How do you get Implied TEV?

A

Use cash flow avail to all eg UFCF, FCFF

Use WACC as DR

37
Q

Implied value of company formula [cash flow / (DR - cash flow growth rate)]

How do you get Implied EqV?

A

Use cash flow avail only to equity investors eg. LFCF, FCF

Use cost of equity as DR

38
Q

Can a single change affect current EqV and Current TEV?

A

If net operating assets and cse change
eg. issue $100 stock to purchase $100 PPE

39
Q

Why does TEV not necessarily represent true cost to acquire a company?

A
  • treatment of sellers’ existing debt and cash differ based on deal terms
    eg. buyer may refinance it instead of paying it
  • buyer pays additional fees eg. legal, not reflected in TEV
40
Q

If CoA has 100% equity, CoB 50% equity 50% debt, why is TEV different?

A

they have diff cap structures which affect WACC

41
Q

What causes EqV to change?

A

Changes in CSE, EqV will change as much.

42
Q

What causes TEV to change?

A

Change in net operating assets, TEV will change as much.

43
Q

Why is TEV considered Cap Structure neutral?

A

measures value to all stakeholders, not just equity and debt capital providers

Equity/ Enterprise Value (3 decks)

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