VALUATIONS Flashcards
Why do we look at both Enterprise Value and Equity Value?
Enterprise Value reflects the company’s value attributable to all investors.
Equity Value represents only the portion available to shareholders. We look at both because Equity Value is what the public sees, while Enterprise Value offers a more holistic view of the company’s worth.
When evaluating an acquisition, should you focus on Enterprise Value or Equity Value?
You focus on Enterprise Value, because it reflects the total amount that all investors (debt and equity) are entitled to.
Equity Value ignores debt and other obligations that an acquirer will likely have to assume or refinance.
What is the basic formula for Enterprise Value?
Enterprise Value = Equity Value + Net Debt + Preferred Stock + Minority Interest
Sometimes, other items like capital leases and unfunded pension obligations are added.
Why is Minority Interest added in the calculation of Enterprise Value?
When a company owns more than 50% of another entity, it consolidates 100% of that subsidiary’s financial results in its own statements.
Metrics like revenue and EBITDA then reflect the entire subsidiary, so you add Minority Interest to align the ownership value with those consolidated figures.
How do you calculate fully diluted shares?
Start with the basic share count and add the dilutive effect of options, warrants, or convertible securities.
Use the Treasury Stock Method for options and warrants: assume in-the-money instruments are exercised and any proceeds buy back shares.
Why is debt cheaper than equity?
Interest - tax deductible
