Calculating Equity Value and Enterprise Value Flashcards
(6 cards)
Is it accurate to subtract 100% of the cash balance when moving from Equity Value to Enterprise Vale?
No, but everyone does it anyway.
Technically you should subtract only the excess cash. If a company has $1,000 in Cash but needs only $200 to run its business, you should subtract $800 rather than $1,000 when calculating Enterprise Value.
However, companies rarely disclose this number, and it is almost impossible to determine on your own, so in practice everyone just subtracts the entire cash balance.
Why do you NOT subtract Goodwill when moving from Equity Value to Enterprise Value?
Goodwill is a core-business Asset, so you should not subtract it when moving to Enterprise Value
Goodwill reflects the premiums paid for companies that the company previously acquired.
Why might you subtract only part of a company’s Deferred Tax Assets when calculating Enterprise Value?
You should only subtract the Net Operating Losses that are in the DTA because those are non-operational in nature.
How do you factor in Working Capital when moving from Equity Value to Enterprise Value?
You don’t. Equity Value represents the value of ALL the company’s Assets but only to equity investors.
So you subtract items only if they’re non-core - business assets, and you add Liability and Equity line items only if they represent different investor groups.
There’s no reason to add or subtract working capital, as both Equity Value and Enterprise Value reflect it implicitly.
Why do you subtract Equity Investments (Associate Companies), when moving from Equity Value to Enterprise Value?
- They are non core business assets since the company can operate without them
- You need to do this for comparable purposes.
Why do you add Noncontrolling interests when moving from Equity Value to Enterprise Value?
- Noncontrolling interest represent another investor group
- You need to do this for comparability purposes
