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Equity/ Enterprise Value > Key Rule #4 to #6 > Flashcards

Key Rule #4 to #6 Flashcards

1
Q

What do dilutive securities do?

A

create more shares

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2
Q

Why do companies issue dilutive securities?

A

decrease cash operating expenses b/c can pay less salaries
increase retention

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3
Q

What is diluted equity value?

A

Decrease in equity ownershp that occurs when a company issues new shares

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4
Q

How to calculate dilution for everything except convertible bonds?

A

Treasury Stock Method

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5
Q

How do you use the treasury stock method?

A
  • if current share price > exercise price
  • ees pay co price x options to exercise, get 1 share/ option
  • co uses proceeds to repurcahse newly created shares at the current share price
  • shares that don’t get bought are the net dilution
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6
Q

What are the cons of the treasury stock method?

A
  • cos/ ees don’t necessarily act like this
  • still use b/c standardizes things, better comparison
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7
Q

For a public co what do you calculate first?

A

EqV, before moving to TEV

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8
Q

For TEV what values do you use?

A

use market value
if not available, book value (except for eqv)

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9
Q

What is restricted stock?

A

incentive compensation for ees

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10
Q

What are RSUs?

A

Restricted stock units- bound by time

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11
Q

What are performance shares?

A

Performance goal restriction

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12
Q

Which securities use the treasury stock method to calculate dilution?

A

Restricted Stock, RSUs, Performance Shares

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13
Q

Do you add restricted stock to common stock count?

A

Y

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14
Q

Do you add restricted stock to diluted share count?

A

N

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15
Q

What is a convertible bond?

A
  • alternative form of debt
  • co pays lower interest rates in exchange for giving holders option to convert into new shares if share price reaches a level
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16
Q

What are the pathways by which a convertible bond could reach diluted shares?

A
  • if current share price > converstion price= all convert
    principal / conversion price
  • capped call
17
Q

What happens in a capped call?

A
  • if share price reaches conversion price, co buys back all the newly released shares
  • dilution cancelled
  • share price climbs and reaches warrant exercise price
  • warrants are sold, creating new stock as they are exercised
  • some dilution but less than initial
  • use TSM to calculate dilution on warrants
18
Q

Why do we need to find diluted share count?

A

Find implied EqV and TeV to find implied share price

19
Q

Why is implied share price so important?

A

compare to current stock price to see if undervalued.

20
Q

How do you calculate implied share price?

A

EqV/share count

21
Q

Is it accurate to minus 100% of cash balance when EqV -> TEV?

A
  • no b/c some cash is an operating asset b/c need minimum cash to run biz
22
Q

Why do we minus all cash?

A

b/c the amt of cash as OA is seldom disclosed and varies, so subtract

23
Q

Why do you not subtract goodwill when moving from EqV to TEV?

A
  • if subtract, saying “this acq is not part of core biz anymore”
24
Q

When do u subtract goodwill when moving from EqV to TEV?

A

if acq has been sold/ shut down

25
Q

How do you factor in working capital when going to EqV to TEV?

A

don’t adjust anything
each WC item counts in both net assets and net operating assets -> EqV and TEV include full value of WC

26
Q

Why subtract equity investments when EqV to TEV?

A
  • they’re non-operating assets since parent company has minority status and can’t control them
  • compatability- EqV implicitly includes value of the stake. But TEV-based multiples w numerators eg. EBITDA don’t include so subtract away to let TEV mults match it
27
Q

What is a valuation allowance?

A

an account that offsets a DTA when it is more likely than not that some/ all of DTA will not be realized

28
Q

Why subtract only part of co’s DTA when calc TEV?

A
  • only subtract NOL b/c they’re non-operating assets- less related to operations than DTA’s other items
  • also decrease NOL in proportion to Valuation Allowance/ DTA as VA indicates that co doesn’t expect to realize full DTA benefit
29
Q

What is basic equity value vs diluted equity value?

A

diltued shares outstanding x common share price vs just common shares outstanding
more accurate measure of co’s net assets are worth to common shareholders

30
Q

Why do you add noncontrolling interests when EqV to TEV?

A
  • NCI presents another investor group- minority share holders of the other co which co owns a majority of
  • they are investors b/c co controls other co b/c of majority stake
  • comparability- financial statements are 100% consolidated when co owns majority stake in other co -> rev, EBIT, EBITDA include 100% of financials
  • But EqV only has the % of the ownership
  • remaining %tage is added when creating TEV to bring it to par with numerators of TEV mults whihch reflect 100%

Equity/ Enterprise Value (3 decks)

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