Key Rule #1- Basics

Question 1

What are the 2 ways to value a company?

Answer 1

Current and implied values

Question 2

What is the current value of a company?

Answer 2

What it’s worth right now

Question 3

What is the implied value of a company?

Answer 3

What it should be worth according to analysis.

Question 4

Why could implied and current values be different?

Answer 4

• different growth rates
• could refer to different investor groups who funded the co

Question 5

What is enterprise value?

Answer 5

Value of a company/s net operating assets to all investors.

Question 6

What is net operating assets otherwise known as?

Answer 6

Core business operations

Question 7

What is the formula for net operating assets?

Answer 7

OA - OL

Question 8

How do you calculate current TEV?

Answer 8

equity value - non-operating assets + l&e items that represent other investor groups

Question 9

What are non-operating assets?

Answer 9

company doesn’t need that asset to sell and deliver products
and are excluded from TEV

Question 10

What are some examples of non-operating assets?

Answer 10

• cash
• financial investments

Question 11

What are examples of l&e items that represent other investor groups

Answer 11

• debt
• preferred stock
• noncontrolling interests

Question 12

What is equity value?

Answer 12

value of net assets attributable to equity

Question 13

What is the formula for net assets?

Answer 13

Total Assets - Total Liability

Question 14

What is net assets otherwise known as?

Answer 14

everything a company has

Question 15

How do you calculate Current EV for a public company?

Answer 15

shares outstanding x current share price

Question 16

How do you calculate Current EV for a private company?

Answer 16

valuation in last funding round

Question 17

What happens to EqV if cap structure changes

Answer 17

EqV will change

Question 18

What happens to TEV if cap structure changes?

Answer 18

won’t change as much or no change

Question 19

How do you find Current TEV?

Answer 19

the long formula

Question 20

How do you find implied TEV?

Answer 20

DCF/ Comps/ Precedent analysis

Question 21

How do you find EqV and TEV of a private company?

Answer 21

in practice, skip current and use implied everything

Question 22

Why use both TEV and EqV?

Answer 22

• diff concepts
• impt to diff types of investors
• TEV not as affected by cap str changes as EqV
• actions taken by 1 investor group affect the rest eg. raise debt -> affect risk and returns for common shareholders

Question 23

Why pair net assets w common shareholders in EqV?

Answer 23

• CSE is generated internally via NI and externally (stock issuance)
• co can use for both operating and non-operating assets

Question 24

Why pair net operating assets w TEV?

Answer 24

• co raises funds via outside (eg. debt, preferred stock)
• use to pay for OA rather than non-OA

Question 25

Difference between current and implied TEV?

Answer 25

C: what market thinks core biz is worth to all investors I: what u think based on analysis

Question 26

Difference in how current and implied TEV are calculated?

Answer 26

C: long formula Implied: DCF/ Precedent/ Comps

Question 27

What is shareholder equity?

Answer 27

- accounting metric, book value

Question 28

What is the formula for shareholder equity?

Answer 28

total asset - total liab

Question 29

Equity value vs Shareholder equity

Answer 29

EqV: market valuation metric Shareholder equity: accounting metric

Question 30

Why might Current TEV be different from Implied TEV?

Answer 30

disagree w market on discount rate

Question 31

Why do you minus cash, add debt add preferred stock when EqV -> TEV?

Answer 31

- subtract Non-Operating assets b/c TEV only reflects net operating assets - add L&E line items that represent other investor groups beyond common shareholders b/c TEV represents all investors

Question 32

Can EqV be -ve?

Answer 32

- current EqV can't b/c how can the formula be -ve? - implied EqV can b/c use views to calculate eg. if implied TEV is 0, has more debt than cash.

Question 33

Can TEV ever be -ve?

Answer 33

- Current: yes eg. if cash > EqV and no debt - Implied: yes

Question 34

Why do financing events such as paying dividends/ issuing debt not alter Current TEV?

Answer 34

- current TEV changes only if Net Operating Assets changes - none of these change net operating assets so no change

Question 35

What affects current TEV?

Answer 35

changes to company's net operating assets affect TEV eg. buy PPE

Question 36

Implied value of company formula [cash flow / (DR - cash flow growth rate)] How do you get Implied TEV?

Answer 36

Use cash flow avail to all eg UFCF, FCFF Use WACC as DR

Question 37

Implied value of company formula [cash flow / (DR - cash flow growth rate)] How do you get Implied EqV?

Answer 37

Use cash flow avail only to equity investors eg. LFCF, FCF Use cost of equity as DR

Question 38

Can a single change affect current EqV and Current TEV?

Answer 38

If net operating assets and cse change eg. issue $100 stock to purchase $100 PPE

Question 39

Why does TEV not necessarily represent true cost to acquire a company?

Answer 39

- treatment of sellers' existing debt and cash differ based on deal terms eg. buyer may refinance it instead of paying it - buyer pays additional fees eg. legal, not reflected in TEV

Question 40

If CoA has 100% equity, CoB 50% equity 50% debt, why is TEV different?

Answer 40

they have diff cap structures which affect WACC

Question 41

What causes EqV to change?

Answer 41

Changes in CSE, EqV will change as much.

Question 42

What causes TEV to change?

Answer 42

Change in net operating assets, TEV will change as much.

Question 43

Why is TEV considered Cap Structure neutral?

Answer 43

measures value to all stakeholders, not just equity and debt capital providers