Value Multiples Flashcards
whats the difference between firm and enterprise value?
firm value = MV equity + MV debt
Enterprise value = MV equity + MV debt - cash holdings
which ratio is similar to EV/BV?
P/BV, this ratio simply applies to the value of the entire firm instead of a single equity value.
which ratio is similar to EV/ revenue (sales)?
P (equity)/sales ratio: however this is for entire firm and shows a measure of firm value turnover.
Which ratio is used as a scaling variable?
EV/ EBIT
What three demoninators can be used to calculate Value/ Operating earnings?
EBIT
EBITDA
EBIT(1-t)
can EV/BV easily be calculated? why? why not?
Yes because BV of capital is always positive even when BV of equity is negative.
is the P/S or the EV/S (Revenue) generally larger? Why? in which circumstance would the EV/S ratio be smaller?
EV/revenue (sales), because the numerator also includeds debt.
EV/S is smaller when the company has more cash than debt (i.e. EV/S = PS ratio + (debt-cash/sales)
what is another name for debt minus cash?
NET debt
What is the main problem with these ratios?
They use market values to calculate EV, therefore if the whole market is over priced the ratio will be over valued too.
How is FCFF calculated
FCFF = Ebit (1-t) - (1-reinvestment rate)
how do you calculate EV using FCFF?
EV = FCFF next yr/ Kcap - g
How do you calculate return on capital (ROC)?
Ebit (1-t) / BV capital
how is growth calculated?
g = ROC x reinvestment rate (b)
remeber on formula sheet that this is why we have a g in the EV / BV of cap formula
what is the simplified formula for EV/BV?
ROC-g / Kcap - g
if reinvestment rate (b) increases will the EV increase based on the EV/BV multiple(ratio)?
if reinvestment rate (b) increases then g increases, however value ill only increase if ROC is greater than Kcap
