Equity Value & Enterprise Value

Equity Value

Value of all company assets to common equity shareholders

# of Shares * Market Share Price

Aka Market Capitalization

Enterprise Value

Value of a company’s core business assets to all shareholders

Enterprise Value Formula

EV = Debt + Preferred Stock + Non Controlling Interest - Cash & Cash Equivalents

Other things that could be added to EV

• Capital leases (debt)

• Unfunded pension obligations

Example things to subtract from EV

• NOLs: Non-operating asset

• Short/long term investments

• Assets held for sale

Cash Equivalent Examples

• Marketable securities

• T-Bills/gov bonds (<1 yr)

• Commercial paper (corporate bonds < 9 months)

Non core assets

Current Assets:

• Cash

• Short-term investments

Non current assets:

• Long-term investments

Why is cash a non core/operating asset?

It is a medium for the business’ actual core operations

What items represent enterprise value on the balance sheet?

• Assets - Cash & Cash Equivalents - Short Term Investments - Long Term Investments

• Liabilities - (Other liabilities)

• Stockholder’s equity

What items represent equity value on the balance sheet?

• Assets

• Shareholder’s Equity - Preferred Stock

What happens when you issue a dividend?

• EQV decreases

• EV stays same

What happens when you use cash to buy a tractor?

• EV goes up

• EQV stays the same

What happens when an unprofitable division is closed (or) business performs better than expected?

• EQV increases

• EV increases

When do you subtract items from enterprise value?

When it is a non core business asset

When do you add an item to enterprise value?

When it affects all investment groups

Why do you add Non Controlling Interest?

To provide an apples-to-apples relation between EV and denominator in multiples like EV?EBIDTA, which reflect 100% company ownership

Cost Method

• 0-20% ownership

• Purchased stock is recorded as noncurrent asset at historical purchase price

• Dividends received are recorded and taxed as income

Equity Method

• 20% - 50% ownership

• Initially recorded like cost method but adjusted for your share of the company’s profits and losses

• Dividends reduce listed value of shares (not treated as income)

Consolidation Method

• 50% - 100% ownership

• Parent consolidates 100% of the sub and records the minority owners’ share as Non Controlling interest in equity

• Dividends to minority owners reduce the NCI balance (not an expense)

Can current equity value be negative?

No

Can current enterprise value be negative?

Yes if cash > equity value & debt

• Company on the verge of bankruptcy (virtually no market cap)

• Financial institutions or asset-heavy firms w/ massive cash balances

Can implied equity value be negative?

Yes

• Modeling financial distress

• Company with negative cashflows

• Dividend recaps

Can balance sheet equity be negative?

Yes, through retained losses

When does a DCF calculate Enterprise Value vs Equity Value?

• Enterprise Value = Unlevered FCF, WACC

• Equity Value = Levered FCF, Cost of Equity

Why is EV not the same as purchase price?

• M&A fees

• Premium paid to common shareholders

Why do we look at enterprise and equity value?

• Serve different purposes

• Define equity and enterprise value

How do you use enterprise value and equity value differently?

• Enterprise Value: Compare companies with different capital structures, evaluating M&A transactions, or using specific valuation mutliples

• Equity Value: Evaluating share prices, calculate multiples (P/E) ratio, analyzing equity only transactions

Why is cash subtracted from Enterprise Value?

Because it is a non-core business asset

Differences between shareholders equity and equity value?

• Difference in formulas

• Equity value reflects market value, shareholders equity represents book value

• Equity value cannot be negative, shareholders equity can