Enterprise value Flashcards
(7 cards)
Explain why an analyst, facing a choice of using a valuation model that values equity directly or a model that first calculates enterprise value, would choose the enterprise value option.
EV is a better valuation estimate to use in comparisons with other companies as it is capital structure neutral.
This allows better quality comparisons between companies with different capital structures.
Explain the treatment of non-controlling interests (NCI) in the EV bridge.
Deducted as NCI represents a source of financing for the operations.
How should lease debt be treated in an EV bridge? Explain you answer.
Deducted along with other forms of debt finance (if going from EV to Equity value) because leases are considered debt-like obligations, representing future payment commitments.
What is the difference between “total enterprise value” (TEV) and “operating enterprise value” (OEV)?
TEV = OEV + Value of Non-operating assets
An analyst at a conference suggests that enterprise value represents the market value of debt and the market value of equity. But during your university programme you understood that enterprise value represents the market value of the operations of a firm. How would you reconcile these two positions?
These can be thought of as the two different ways of looking at EV. The financing ‘lens’ represents all of the funding that supports the value of the operations. Therefore: Value of net operating assets = market value of debt + market value of equity
The Enterprise Value (EV) of a company is always higher than its market capitalisation. Is this true?
Enterprise value includes market capitalization, debt, and preferred equity, minus cash and cash equivalents. While EV is typically higher than market capitalisation due to the inclusion of debt, it can be lower if the company has significant cash reserves and a lower amount of debt. For example, a company with $100m of gross debt, $150m of cash and a market capitalisation of $500m would have an EV of $500m + $100m - $150m = $450m, lower than the equity value.
Can Enterprise value (EV) be used in all industries?
EV is not suitable for any industry where there is a lack of distinction between the operations of a company and the associated sources of finance. An obvious example of this would be a bank. Banks operations ‘are’ financing. So, a fixed income liability cannot clearly be labelled as operating or financing.
