How Events Impact Equity Value and Enterprise Value Flashcards
(12 cards)
A company issues $200 million in new shares. How do Equity Value, Enterprise Value, EV / EBITDA, and P / E change?
Equity Value increases by $200 million because of the new shares, but Enterprise Value stays the same.
P / E multiple increase
EV / EBITDA stays the same
A company issues $200 million in new shares, but it will use $100 million from the proceeds to issue Dividends to shareholders. How does Enterprise Value, Equity Value, the P / E multiple, and EV / EBITDA change?
Equity Value increase by $200 million but then falls by $100 million because dividends reduce Equity Value, so Equity Value is up by only $100 million
Enterprise value stays the same because the company ends up with $100 million in cash, the extra Cash offsets the higher equity value.
The P / E multiple increases and the EV / EBITDA stays the same
A company uses $200 million to acquire another business for $100 million. How does Enterprise Value, Equity Value, the P / E multiple, and EV / EBITDA change?
Equity Value increase by $200 million, Enterprise Value increase by $100 million because cash is used to acquire a core business asset.
Both the P / E multiple and the EV / EBITDA multiple increase by
How is Enterprise Value, Equity Value, P / E Multiple and EV / EBITDA ratio impacted if a company raises $200 million in Debt to acquire a company for $100 million?
Equity Value and P / E multiple no longer change
Enterprise Value also doesn’t change because the extra cash and extra debt cancel each other out.
Let’s say a company raises $200 million in Debt to acquire another company for a purchase price of $200 million. The other company’s common shareholders’ equity is exactly $200 million. How does everything change?
- $200 million Debt issuance - neither Equity Value nor Enterprise Value will change.
- Enterprise Value will increase by $200 million because this other company counts as a core-business asset.
P / E multiple stays the same, and the EV / EBITDA multiple increases
What happens to everything if a company issues $100 in Dividends?
Equity Value decreases by $100 million
Enterprise Value stays the same because lower equity value and the lower cash balance cancel out
P / E multiple falls, EV / EBITDA multiple stays the same
A company has a current equity value of $200, $50 in cash, and $100 Debt. If the company spends $25 of its Cash balance to purchase PPE, how does everything change?
- The company’s current enterprise value is $200 + $100 - $50 = $250
- Equity Value won’t change when it uses $25 of Cash to purchase PP&E because cash and PPE are the same, just assets.
- ITs Enterprise Value will increase by $25 because the company has converted a non-core business asset to a core business asset
A company has excess cash, what are the valuation implications if it uses that Cash to repurchase shares versus repay debt?
Enterprise Value doesn’t change in either situation. The reduced cash balance offsets the reduced equity value.
Equity value decreases if the company repurchases shares.
A CEO finds $100 of cash on the street and adds it to the company’s bank account. How much do Equity Value and Enterprise Value change?
Equity value will increase by $100 because you have to attribute this “free cash” to some investor group.
Enterprise value will not change because cash is a non-core business asset.
A company issues a press release indicating that it expects its revenue to grow at 20% rather than its previous estimate of 10%. How does everything change?
This represents its core business
Enterprise value and equity value will increase. Its Equity Value will increase because the company’s Total Assets are more valuable if they are expected to generate higher growth.
Enterprise Value increases because its core business assets are more valuable.
When there’s an operational change, how can you determine whether Equity Value or Enterprise Value will change by more?
Generally, Enterprise value will change by more because it is affected only by these operational changes
Since equity Value is affected by both financial and operational changes, operational changes tend to make less of an impact.
Will operational changes impact a company’s current or implied enterprise value by more?
Operational changes will tend to impact a company’s Implied Enterprise Value, by more because you can immediately reflect your views by revising your calculations.
On the other hand, it takes time for the market to reflect these operational changes fully.
