Key Rule #1- Basics Flashcards
What are the 2 ways to value a company?
Current and implied values
What is the current value of a company?
What it’s worth right now
What is the implied value of a company?
What it should be worth according to analysis.
Why could implied and current values be different?
- different growth rates
- could refer to different investor groups who funded the co
What is enterprise value?
Value of a company/s net operating assets to all investors.
What is net operating assets otherwise known as?
Core business operations
What is the formula for net operating assets?
OA - OL
How do you calculate current TEV?
equity value - non-operating assets + l&e items that represent other investor groups
What are non-operating assets?
company doesn’t need that asset to sell and deliver products
and are excluded from TEV
What are some examples of non-operating assets?
- cash
- financial investments
What are examples of l&e items that represent other investor groups
- debt
- preferred stock
- noncontrolling interests
What is equity value?
value of net assets attributable to equity
What is the formula for net assets?
Total Assets - Total Liability
What is net assets otherwise known as?
everything a company has
How do you calculate Current EV for a public company?
shares outstanding x current share price
How do you calculate Current EV for a private company?
valuation in last funding round
What happens to EqV if cap structure changes
EqV will change
What happens to TEV if cap structure changes?
won’t change as much or no change
How do you find Current TEV?
the long formula
How do you find implied TEV?
DCF/ Comps/ Precedent analysis
How do you find EqV and TEV of a private company?
in practice, skip current and use implied everything
Why use both TEV and EqV?
- 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
Why pair net assets w common shareholders in EqV?
- CSE is generated internally via NI and externally (stock issuance)
- co can use for both operating and non-operating assets
Why pair net operating assets w TEV?
- co raises funds via outside (eg. debt, preferred stock)
- use to pay for OA rather than non-OA
Difference between current and implied TEV?
C: what market thinks core biz is worth to all investors
I: what u think based on analysis
Difference in how current and implied TEV are calculated?
C: long formula
Implied: DCF/ Precedent/ Comps
What is shareholder equity?
- accounting metric, book value
What is the formula for shareholder equity?
total asset - total liab
Equity value vs Shareholder equity
EqV: market valuation metric
Shareholder equity: accounting metric
Why might Current TEV be different from Implied TEV?
disagree w market on discount rate
Why do you minus cash, add debt add preferred stock when EqV -> TEV?
- 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
Can EqV be -ve?
- 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.
Can TEV ever be -ve?
- Current: yes eg. if cash > EqV and no debt
- Implied: yes
Why do financing events such as paying dividends/ issuing debt not alter Current TEV?
- current TEV changes only if Net Operating Assets changes
- none of these change net operating assets so no change
What affects current TEV?
changes to company’s net operating assets affect TEV eg. buy PPE
Implied value of company formula [cash flow / (DR - cash flow growth rate)]
How do you get Implied TEV?
Use cash flow avail to all eg UFCF, FCFF
Use WACC as DR
Implied value of company formula [cash flow / (DR - cash flow growth rate)]
How do you get Implied EqV?
Use cash flow avail only to equity investors eg. LFCF, FCF
Use cost of equity as DR
Can a single change affect current EqV and Current TEV?
If net operating assets and cse change
eg. issue $100 stock to purchase $100 PPE
Why does TEV not necessarily represent true cost to acquire a company?
- 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
If CoA has 100% equity, CoB 50% equity 50% debt, why is TEV different?
they have diff cap structures which affect WACC
What causes EqV to change?
Changes in CSE, EqV will change as much.
What causes TEV to change?
Change in net operating assets, TEV will change as much.
Why is TEV considered Cap Structure neutral?
measures value to all stakeholders, not just equity and debt capital providers
