Emmanuel God With Us Jesus Help Me Enterprise & Equity Value Questions

Why do we look at both Enterprise Value and Equity Value?

Enterprise Value represents the value of the company that is attributable to all investors

Equity Value represents the portion available to equity investors (share price x shares outstanding)

You look at both because Equity Value is the price tag set by the public market

While Enterprise Value is the true and holisitc value of the company

When looking at an acquisiton of a company, do you pay more attention to Enterprise Value or Equity Value?

You look at Enterprise Value because that’s the total-takeover price an acquirer really pays and it includes the debt repayment side of value.

What’s the formula for Enterprise Value?

EV = Equity Value + Debt + Preferred Stock + Minoirty Interest - Cash

Why do you need to add minority Interest to EV?

When a company owns over 50% of another company its required to report the financial performance of the other company as part of its own performance.

So even though it down own 100% of the other company it reports 100% of the majority owned subsidiary’s performance.

So for consistency and accurate reflection you add Minority Interest to get Enterprise Value.

How do you calculate fully diluted shares?

Take the basic share count and add the dilutive effect of dilutive securities usually using the Treasury Stock Method.

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Why do you subtract cash in the formula for EV? Is that always accurate?

You subtract cash because its a non-operating asset and in the formula Equity Value implicitly accounts for it.

Its usually accurate but only if you’re subtracting excess cash (cash above the minimum needed to operate)

Is it accurate to add Debt to Equity Value when calculating Enterprise Value?

Yes, because usually when a company acquirers another company, the existing debt is usually refinanced and must be paid off.

Can a company have a negative Enterprise Value? What would that mean?

Yes a company can have a negative enterprise value:

Usually if:

1. it is a company on the brink of bankruptcy

2. Or a financial institution like a bank with large cash balances

Note: There’s alot of overlap as of recent between these 2 reasons

Could a company have a negative Equity Value?

No a company cannot have a negative Equity Value as that would mean you either have a negative share price or negative share count.

How do you account for convertible bonds in the EV formula?

If the convertible bond is below current share price (meaning their attractive to convert), you treat it as equity and apply its dillutive effect on EV.

If convertible bond is above current share price you include it as debt.