EV Bridge Flashcards
Why do we look at both EV and MV
EV is value of company that is attributable to all investors, true value that we use for acquisiton
MV is that for shareholders
EV formula
EV
MV
Debt
Preferred stock
Minority interest
(Cash)
Minority interest
If the company owns over 50% of another company, it is required to report its financial performance as part of its own. Needs to be added to EV so you are comparing apples to apples
How to calculate diluted shares
Take basic share count and add in dilutive effect of stock options and others (convertible preferred stock)
Use treasury stock method
100 shares outstanding at 10 each. 10 options at exercise price of 5 each
Compute fully diluted equity value
Basic equity value is 1000
Options we have 10 new shares but 5 must be paid to transform the.
You receive 50 in additional cash to repurchase them.
So you have 105 shares, at 1050 total diluted equity value
Exercise price beyond share price
Will not have dilutive effect
EV, why substract cash
Really because cash is a non operating asset and EV implicitly accounts for it
But you can really use cash to pay some of the debt you would be acquiring
EV why add debt
Because terms of debt agreement says that debt must be refinanced in an acquisition, the buyer will pay off sellers debt so it is added to purchase price
Can net EV exist
Yes, with extremely large cash balance or abnormally small market cap
CS could have negative EV
Never negative MV as no neg share count or price
Why add preferred stock to EV
Because it pays out a fixed dividend, and these are more senior than equity so it is really more similar to debt than common stock
Convertible bonds for EV
If conversion price is below share price, you count them as additional dilution to EV
If conversion price is lower, you count face value
A company has 1 mn shares otustanding at 100 per share
10 mio in convertible bonds, with par of 1000 and conversion price of 50
First, we are in the money because conversion price is lower. So we count them as additional shares rather than debt
Divide value of bonds by par, we have 10 000 convertible bonds
Number of shares per bond is par divided by conversion so 1000 by 50 is 20
We have 200k new shares. Giving 1.2 mio diluted shares.
Equity value vs SHE
Equity value is market vlue of equity and SHE is book value (can be negative)
Issues with standard EV formula
It is too simple we could
Reduce by net operating losses
Reduce by investments
