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OCR Fin Prep > Equity Value Reading > Flashcards

Equity Value Reading Flashcards

1
Q

Enterprise Value Definition

A

The value of a company’s core business operations
to ALL the investors in the company

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2
Q

Market Value vs Intrinsic Value of a Company

A

Market Value - What is it worth right now? (Share price x shares outstanding)

Intrinsic Value - What should it be worth according to your views

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3
Q

Equity Value Definition (What is it on balance sheet?)

A

EVERYTHING a company has (i.e., ALL its Assets), but only to EQUITY INVESTORS (i.e., common shareholders)

All assets + Common shareholders side of equity portion of B/S

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4
Q

Enterprise Value

A

The value of the company’s CORE BUSINESS OPERATIONS (i.e., ONLY the Assets related to its core business), but to ALL INVESTORS (Equity, Debt, Preferred, and possibly others).

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5
Q

How to calculate equity value of publicly traded company?

A

Shares outstanding x share price

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6
Q

Move from Equity Value to Enterprise Value (Assets)

A

Equity Value: Core-business assets + non-core business assets
Enterprise Value: Core-business assets

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7
Q

Equity Value to Enterprise Value (Investors)

A

Equity Value only value to equity investors
Enterprise Value: Value to equity investors + Value to debt investors + Value to preferred investors

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8
Q

Move from Equity Value to Enterprise Value on Balance Sheet

A

Subtract non-core business assets (cash and investments), add debt liability, add preferred stock, add non controlling interests

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9
Q

Non core business assets

A

What you need to sell goods to a customer.

Cash and investments

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10
Q

Calculate Equity Value on Balance Sheet

A

All Assets + Common Stock Equity Portion

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11
Q

How can enterprise value be negative?

A

Equity value of $100 and cash of $200, and no debt and preferred stock - Strip away non core assets (cash)

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12
Q

What are you trying to calculate when looking for cash flow to all investors?

A

Enterprise value - Use WACC

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13
Q

If a company with an Equity Value of $1,000 and Enterprise Value of $1,200 issues $100 of
Stock, what happens to both metrics?

A

So, the company now has $100 in extra Assets, and those extra Assets were funded by Equity investors. As a result, Equity Value increases by $100.

Equity Value is $100 higher, but you subtract the extra $100 of Cash. There are no new, other investor groups to add. The changes cancel each other out, and Enterprise Value stays the same.

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14
Q

Move from Enterprise Value to Equity Value on BS

A
  • Add back non core business assets (Cash / Short & Long Term Investments)
  • Subtract debt
  • Subtract preferred stock
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15
Q

Metrics that pair with Enterprise value

A
  • Revenue
    -Operating Income or EBIT
    -Net Operating Profit After Taxes (NOPAT), defined as EBIT * (1 – Tax Rate)
    EBITDA
  • Unlevered Free Cash Flow (UFCF) or Free Cash Flow to Firm (FCFF) – Cash flow that’s
    available to ALL investors
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16
Q

Metrics that pair with Equity Value

A
  • Net Income (or Net Income to Common if there are Preferred Dividends)
  • Free Cash Flow (CFO – CapEx)
  • Levered Free Cash Flow (CFO – CapEx – Mandatory Debt Repayments)
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17
Q

Why is cash not the opposite of debt?

A

Because most debt doesn’t allow for early repayment

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18
Q

If a metric reflects dividends and interest payments (subtracted), what metric should it be paired up with

A

Equity Value

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19
Q

Equity value does not include…

A

Debt and preferred stock

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20
Q

What income measurement should you look at when measuring equity value?

A

Net income to common stock

21
Q

Why pair equity value with net income to common?

A

Equity Value does not include Debt or Preferred Stock, and Net Income to Common includes Interest Expense and Preferred Div

22
Q

Which year FCF should you look at when valuing a company using multiples?

A

Year 2 because we’re currently in year 1 and you want to look forward.

23
Q

What can you say about two similar companies trading at different multiples?

(END KEY RULE 3)

A

The company with the higher multiple has the higher expected cash flow growth rate.

24
Q

When cash flow is available to all investors, what discount rate should you use?

A

WACC

25
Q

Why does enterprise value have to change if you take out additional debt or change equity structure?

A

WACC changes when you change company structure.

26
Q

Whats cheaper? Debt or Equity?

(END KEY RULE 4)

A

Debt - Thats why WACC decreases when you increase leverage up to a certain point.

27
Q

What effect does issuing dividends have on the B/S?

(END KEY RULE 5)

A

Reduces retained earnings under equity section, thus lowering equity value

28
Q

Why do company’s use stock compensation? Downside of using stock compensation?

(END KEY RULE 6)

A

Reduces up front cash

Can dilute shares, thus lowering share price.

29
Q

How to move from equity value to enterprise value

A

you subtract non-core-business Assets, and you add items that represent other investor groups.

30
Q

Move from Enterprise to Equity Value

A

You add non-core-business Assets, and you subtract items that represent other investor groups.

31
Q

3 Key rules to deciding what to add / subtract to enterprise value

A

Rule of Thumb #1: Add Long-Term Funding Sources When Moving from Equity Value to Enterprise Value (Debt, preferred Stock, underfunded pension plans, capital leases)

Rule of Thumb #2: Add Items That Will Cost a Potential Acquirer Extra When Moving from Equity Value to Enterprise Value (debt or preferred stock that has to be repaid if new ownership takes control)

Rule of Thumb #3: Subtract Items That Are NOT Operating Assets When Moving from Equity Value to Enterprise Value (Could a company not continue to function without a specific asset, or does this specific asset generate revenue.)

32
Q

Pick which items to subtract when moving from equity to enterprise value:

A
33
Q

PICK WHICH ITEMS TO ADD WHEN GOING FROM EQUITY VALUE TO ENTERPRISE VALUE

A
34
Q

Equity Investments on B/S Definition

(END KEY RULE 7)

A

which are Assets that represent a company’s stake in another company when it owns less than 50% of that company.

35
Q

How to calculate EBIT?

A

Operating Income on Income Statement

36
Q

Noncontrolling Interests Definition

A

they’re Liability & Equity line items that are used when a company owns more than 50% but less than 100% of another company

But be careful – the Noncontrolling Interest itself represent the portion the Parent Company does NOT own in the other company.

37
Q

How to calculate EBITDA

A

Operating Income on the Income Statement + Depreciation & Amortization (from the CFS).

38
Q

How to calculate Net Income on income statement

A

Net Incom to common

39
Q

Decide whether each applies to Enterprise / Equity Value:

EBIT

EBITDA

Net Income

A

Ebit - Enterprise

EBITDA - Enterprise

Net Income - Equity

40
Q

What does each metric mean?

EBIT

EBITDA

Net Income

A

EBIT = Core, recurring business profitability, before the impact of capital structure and taxes.

EBITDA = Proxy for core, recurring business cash flow from operations, before the impact of capital structure and taxes.

Net Income = Profit after taxes, the impact of capital structure (interest), AND non-core business activities.

41
Q

Advantage of EBIT over EBITDA

(End key rule 8)

A

EBIT reflects effects of CapEx spenditures

42
Q

How to calculate Free Cash Flow

A

Take free cash flow from operations and subtract by capex.

43
Q

What are you looking for when looking for cash flow available to the firm

A

Unlevered free cash flow

44
Q

Who does levered free cash flow give cash to?

A

Just equity investors

45
Q

Free cash flow formula

A

Cash Flow from Operations – CapEx.

46
Q

Ulevered Free Cash Flow formula

A

Unlevered Free Cash Flow: NOPAT + Non-Cash Adjustments and Changes in Working

47
Q

Levered Free Cash Flow formula

End Key Rule 9

A

Levered Free Cash Flow: Net Income + Non-Cash Adjustments and Changes in Working Capital from CFS – CapEx – (Mandatory?) Debt Repayments.

48
Q
A

OCR Fin Prep (10 decks)

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