The Concepts of Equity Value & Enterprise Value Flashcards
Equity Value Vs. Enterprise Value (14 cards)
What do Equity Value and Enterprise Value Mean?
Equity Value represents the value of EVERYTHING the company has, but only to COMMON EQUITY INVESTORS
Enterprise Value represents the value of the company’s CORE BUSINESS OPERATIONS, but to ALL INVESTORS (Equity, Debt, Preferred, and possibly others)
Why do we look at both Equity Value and Enterprise Value?
Neither one is better or more accurate.
Enterprise value is not affected by changes in the company’s capital structure as much as Equity Value
Common shareholders and institutional investors often focus on Equity Value because they care more about what a company’s shares are worth.
What’s the difference between Current Enterprise Value and Implied Enterprise Value?
Current Enterprise Value is what “the market” as a whole thinks the company’s core business operations are worth to all investors
Implied Enterprise Value is what you think a company is worth based on your views and analysis
How do you calculate Current Enterprise Value?
Start with Current Equity Value, subtracting non-core-business assets, and adding liability and equity line items that represent different investor groups.
How do you calculate Implied Enterprise Value?
Using valuation methodologies such as Discounted Cash Flow (DCF) analysis, comparable public companies, and precedent transactions.
When calculating Enterprise Value, why do you subtract Cash, add Debt, add Preferred Stock, and so on?
You subtract assets when they represent non-core-business assets.
You add Liability & Equity line items when they represent different investor groups beyond the common shareholders.
Debt and preferred stock are the most common examples, but unfunded pensions and capital leases also qualify.
Say you buy a house using $600K mortgage and a $200K down payment. What are the real-world analogies for Equity Value and Enterprise Value in this case?
The Enterprise Value is the $800K value of the house, and it corresponds to just the core value of the house: The land, the foundation, the walls, rooms, etc.
The Equity Value is the $200K down payment you’re making, and it corresponds to everything above PLUS any noncore assets you get along with the house: Random Tools and garden supplies, lawn chairs, or anything else that you’re planning to sell immediately.
Can a company’s Equity Value ever be negative?
A company’s current equity value can never be negative, b/c it is Shares Outstanding * Current Share price, and neither of those can be negative
Its Implied Equity can be negative because you use your own assumptions to calculate that.
Can a company’s Enterprise Value ever be negative?
Yes, both current and implied enterprise value could easily be negative.
Having more cash than market cap often results in a company having negative enterprise value.
Do financing related events such as issuing Dividends or raising Debt effect Enterprise Value?
NO, Enterprise value reflects the value of a company’s core business operations to ALL investors in a company
Issuing Dividends, issuing stock, repurchasing stock, issuing/ repaying Debt do not impact a company’s core business, so they do not affect Enterprise Value
Note: In realty, there will still be a small impact on Enterprise Value; this is just the theory.
If financing-related events do not affect Enterprise Value, what DOES affect it?
Only changes to a company’s core business will affect Enterprise Value.
If a company wins a major contract with a new customer, does equity value or enterprise value change?
Both will change, the whole point of Equity Value is that it is affected by BOTH operational and financial changes, whereas Enterprise Value is affected by only operational changes.
Why does Enterprise Value NOT necessarily represent the “true cost” to acquire a company?
- The buyer may not necessarily have to repay the seller’s Debt - 99% cases, they do, or they have to refinance it, by replacing it with new debt.
- The buyer may not get the seller’s entire cash balance. The seller needs a certain minimum amount of Cash to continue operating, and so the seller’s cash may not reduce the effective purchase price 1 for 1
- The buyer will have to pay additional fees for M&A advisory, accounting, legal services, and financing to acquire a company. None of these are accounted for in enterprise value.
Company A and B are the same in all respects, but company A is financed with 100% Equity and Company B is financed with 50% Equity and 50% Debt, will their Enterprise Values be the same?
No
A company’s capital structure impacts the Discount Rate you use to calculate the Implied Enterprise Value
Enterprise Value will be LESS affected by capital structure changes than Equity Value, but there will still be some impact even from relatively small changes.
