Week 3 Enterprise Value and Equity Value

What does Equity Value represent?

The value of a company but only to the EQUITY shareholders

What are the main ways equity value commonly calculated?

The two most common ways are Market Capitalization (Share Price × Diluted Shares Outstanding) and Intrinsic/Implied Equity Value (EV − Net Debt − Preferred Equity − NCI). Note: Book Value of Equity is technically another way to calculate it, but it's rarely used in practice, since it reflects historical accounting values rather than what the business is actually worth. It's generally better not to bring it up as a common method in an interview setting.

Why does Equity Value subtract Net Debt, Preferred Equity, and NCI from EV?

Because each of these represents a claim senior to common equity, debt holders, preferred shareholders, and minority owners of a consolidated subsidiary all get paid before common equity holders receive anything in the event of bankruptcy or sale of a company. Subtracting them out of EV leaves only what's left over for equity shareholders

Although Implied and Intrinsic Value are technically the same concept, how do they slightly differ?

Some analysts draw a finer distinction: Intrinsic Value specifically refers to the output of your own DCF, while Implied Value refers to the output of Comps or Precedents, since you're implying a value based on other companies' multiples, not your own standalone cash flow projections. You can also have intrinsic and implied value for your Enterprise Value and not just Equity Value. DO NOT WORRY ABOUT THIS DISTINCTION UNTIL LATER

Can multiple Intrinsic Values exist for the same company at the same time?

Yes. Intrinsic Value is subjective

What's the difference between Basic Shares Outstanding and Diluted Shares Outstanding? Why do we use diluted shares outstanding in the calculation?

Basic Shares Outstanding is the current share count. Diluted Shares Outstanding adds in shares that would be created if in-the-money dilutive securities (options, warrants, convertible debt) were exercised. We use diluted shares because they represent the actual number of shares that would exist if all those securities converted.

Company B has 20 basic shares outstanding, 10 in-the-money options, and 5 out-of-the-money options. Stock price is $6. What is Diluted Equity Value?

Diluted Shares = 20 + 10 = 30 (out-of-the-money options excluded, since exercising them wouldn't be profitable). Equity Value = $6 × 30 = $180

An analyst says a stock's Intrinsic Value is $20/share, but the market is currently trading it at $15/share. How much of a discount to Analyst Estimated NAV is this stock trading at? What does this analyst likely believe about the stock, and what would they likely do?

Discount = ($20 − $15) / $20 = 25%. The stock is trading at a 25% discount to the analyst's estimated value. The analyst likely believes the stock is undervalued, since their Intrinsic Value estimate is higher than the Current Market Value. They would likely recommend buying the stock

Company A has an Enterprise Value of $800. It has Total Debt of $200, Cash of $50, Preferred Equity of $30, NCI of $20, and 100 shares outstanding. What is the Implied Equity Value, and what is the Implied Equity Value per share?

Equity Value = EV − Net Debt − Preferred − NCI = $800 − $150 − $30 − $20 = $600. Implied Share Price = Equity Value ÷ Shares Outstanding = $600 ÷ 100 = $6.00 per share

Company E has a stock price of $8, 60 shares outstanding, Total Debt of $150, Cash of $40, Preferred Equity of $30, Inventory of $70, and Accounts Receivable of $50. What is the company's Equity Value?

Equity Value = Market Cap = Stock Price × Shares Outstanding = $8 × 60 = $480. We use market cap because the company is public given we have shares and a stock price

Why do you need to calculate an Intrinsic Value for a private company specifically, rather than just checking its Current Market Value?

Private companies don't have a Current Market Value, since there's no public share price to observe, no market exists where their equity trades. This means Intrinsic Value (calculated through DCF, Comps, or Precedents) is often the ONLY estimate of worth that exists for a private company

Why is Enterprise Value capital structure neutral?

Because EV represents the value of the core operations themselves. That value doesn't care whether you paid for it with debt or equity, a $1mm factory is worth $1mm whether you took out a loan to buy it or paid cash. The financing decision changes who has a claim on the value, not the value itself

Why does EV only capture Core Assets, while Equity Value can include both Core and Non-Core Assets?

EV represents the value of the operating business itself, so it deliberately excludes non-core assets. Equity Value represents everything that belongs to shareholders once all other claims are repaid, which includes both the core operations AND any non-core assets sitting on the balance sheet.

What does "levered" mean in the context of EV, Equity Value, EBITDA, and Net Income?

It means whether debt's impact has already been factored in or not. A levered metric or value has already had debt's effect removed, like Equity Value (debt's claim subtracted) or Net Income (interest expense subtracted). An unlevered metric or value hasn't been touched by debt at all, like EV (represents all stakeholders' claims combined) or EBITDA (calculated before interest expense is even deducted). Levered = after debt's impact. Unlevered = before debt's impact

Is Enterprise Value levered or unlevered?

Unlevered. It represents the cash flow available to ALL investors, debt holders and equity holders alike, before anything has been paid out or reduced. Nobody's claim has been prioritized yet, so nothing has been subtracted

Is Equity Value levered or unlevered?

Levered. By the time you get to Equity Value, debt has already been paid out and removed, whether through interest expense hitting Net Income, or through the debt claim itself being subtracted in the EV bridge. What's left is only what belongs to equity holders, after everyone else already got their cut

Company raises $100 in equity and holds it as cash. What happens to EV? What happens to Equity Value?

EV change on left side of equation = $0. Right side or equation: Equity Value +$100, Net Debt change = $0 − $100 = −$100 → Equity Value (+$100) + Net Debt (−$100) = $0 → matches EV change of $0. No change to EV, because core operating assets didn't change. The cash impact is offset by the change in Equity Value, so the two cancel out and leave EV untouched

Company raises $100 in debt and uses it to pay a dividend to equity holders. What happens to EV? What happens to Equity Value?

EV = Equity Value + Net Debt → (−$100) + (+$100) = EV change = $0. Net Debt increases by $100. Cash increases by $100 from the debt raise, then decreases by $100 when paid as a dividend, netting to zero change in cash. Equity Value decreases by $100 because the company paid $100 of cash directly to shareholders as a dividend, so shareholders' claim on the company drops by that amount. EV stays the same, the $100 increase in Net Debt is exactly offset by the $100 decrease in Equity Value. Core operations never changed, only the split between debt holders and equity holders shifted

Company raises $100 of Preferred Equity and uses it to buy PPE. What happens to EV? What happens to Equity Value?

EV change on left side of equation = +$100 Right side: Preferred Equity change = + $100, matches EV change of +$100. EV increases because a core operating asset was purchased. Preferred Equity increases to fund it, and that cash raised from pref gets converted into the core asset

Can Equity Value or EV be negative? Under what scenarios does this happen?

Equity Value can never be negative, share price and share count can't be negative, so the math simply doesn't allow it. EV can be negative. This happens when a company has i) a lot more cash than debt, or ii) a very small Equity Value (or both). Since EV = Equity Value + Net Debt, if Net Debt is negative enough (lots of cash, little debt), it can outweigh Equity Value and push EV below zero.

If you were building "multiples" or "ratios" to value a company, and you had access to EV, Equity Value, EBITDA, and Net Income, how would you pair them up? Why?

Pair EV with EBITDA — both represent value/cash flow to ALL stakeholders. EV hasn't had any claim (debt, preferred, NCI) prioritized over another, and EBITDA hasn't had interest, tax, or dividends deducted yet either, they're on the same basis. Pair Equity Value with Net Income — both represent what's left for common equity holders onl