BIWS EV&EqV Guide

What does Equity Value represent?

The value of all a company’s assets, but only to common equity investors.

What does Enterprise Value represent?

The value of a company’s core business operations to all investors.

Which investor groups are reflected in Enterprise Value?

Common equity, Debt, Preferred Stock, and other investor groups.

Is Enterprise Value inherently more accurate than Equity Value?

No. They measure different concepts and are relevant to different investor groups.

Why do public-market investors often focus on Equity Value?

Because they care about the value of the company’s shares and its implied share price.

What is Current Enterprise Value?

The market’s current view of what the company’s core business operations are worth to all investors.

What is Implied Enterprise Value?

Your estimate of what the company’s core business operations are worth based on valuation analysis.

How is Current Enterprise Value generally calculated?

Start with Current Equity Value, subtract non-core-business Assets, and add claims from other investor groups.

How is Implied Enterprise Value generally estimated?

With valuation methods such as a DCF, comparable public companies, or precedent transactions.

Why can Current Enterprise Value differ from Implied Enterprise Value?

You may use different cash flow growth or Discount Rate assumptions than the market.

What is the simplified company value formula used in the guide?

Company Value = Cash Flow / (Discount Rate – Cash Flow Growth Rate).

Why do you subtract Cash when moving from Equity Value to Enterprise Value?

Cash is generally treated as a non-core-business Asset.

What types of Assets are generally subtracted when moving from Equity Value to Enterprise Value?

Non-core-business Assets.

Besides Cash and Investments, what are examples of non-core-business Assets?

Equity Investments, Assets Held for Sale, and Assets tied to Discontinued Operations.

Why do you add Debt when moving from Equity Value to Enterprise Value?

Debt represents a different investor group beyond common shareholders.

Why do you add Preferred Stock when moving from Equity Value to Enterprise Value?

Preferred Stock represents another investor group beyond common shareholders.

What other items may be added to Equity Value when calculating Enterprise Value?

Items such as Unfunded Pensions and Capital Leases when they represent Debt-like or other investor claims.

Can a company’s Current Equity Value be negative?

No. Current Equity Value cannot be negative.

Can a company’s Implied Equity Value be negative?

Yes. It can be negative if the valuation assumptions imply very low Enterprise Value relative to net Debt and other claims.

Can a company’s Enterprise Value be negative?

Yes. Current or Implied Enterprise Value can be negative.

What is one situation that can produce negative Current Enterprise Value?

The company has more Cash than its Current Equity Value and little or no Debt.

Why do financing-related events generally not affect Enterprise Value in theory?

They do not change the value of the company’s core business operations.

What are examples of financing events that generally do not change Enterprise Value in theory?

Dividends, Stock issuances, share repurchases, and Debt issuances or repayments.

What types of changes affect Enterprise Value?

Changes to the company’s core business operations.

Do operational changes affect Equity Value as well as Enterprise Value?

Yes. Equity Value is affected by both operational and financing changes.

What does Unlevered FCF discounted at WACC produce?

Implied Enterprise Value.

What does Levered FCF discounted at Cost of Equity produce?

Implied Equity Value.

Why does Enterprise Value not necessarily equal the true acquisition cost?

Debt may not be repaid exactly as assumed, not all Cash may be available, and transaction fees are excluded.

Why might a buyer not receive the seller’s full Cash balance in an acquisition?

The seller may need a minimum Cash balance to continue operating.

Are M&A advisory, legal, accounting, and financing fees included in Enterprise Value?

No.

Why can capital structure affect Enterprise Value in reality?

Capital structure affects the Discount Rate used to value the company.

How does adding Debt initially tend to affect WACC?

It tends to reduce WACC because Debt is cheaper than Equity.

What can happen to WACC if a company takes on too much Debt?

WACC can increase as risk to investors rises.

Why is Enterprise Value less sensitive to capital structure than Equity Value?

Enterprise Value focuses on core operations, while Equity Value is directly affected by financing changes.

What happens to Enterprise Value when a company issues Equity and keeps the proceeds as Cash?

Enterprise Value stays the same because the higher Equity Value is offset by higher Cash.

What happens to Equity Value when a company pays a Dividend?

Equity Value decreases by the amount of the Dividend.

What happens to Enterprise Value when a company pays a Dividend, in theory?

It stays the same because the lower Equity Value is offset by lower Cash.

What happens to Enterprise Value when Cash is used to buy a core-business Asset such as PP&E?

Enterprise Value increases because a non-core Asset is converted into a core-business Asset.

Why does Equity Value generally stay unchanged when Cash is exchanged for PP&E?

Total Assets are unchanged; one Asset decreases while another increases.

What happens to Enterprise Value when Cash is used to buy a non-core Asset such as a short-term investment?

Enterprise Value generally stays the same.

What happens to Enterprise Value when a company raises Debt and keeps the proceeds as Cash?

Enterprise Value stays the same in theory because the higher Debt is offset by higher Cash.

What happens to Equity Value when excess Cash is used to repurchase shares?

Equity Value decreases.

What happens to Enterprise Value when excess Cash is used to repurchase shares?

Enterprise Value stays the same in theory.

What happens to Enterprise Value when excess Cash is used to repay Debt?

Enterprise Value stays the same because both Cash and Debt decrease.

What happens to Equity Value when excess Cash is used to repay Debt?

Equity Value stays the same.

If a company receives Cash without issuing Debt or Equity, which investor group is that value attributed to?

Common equity investors.

What happens to Enterprise Value when a company receives additional non-core Cash without changing operations?

Enterprise Value stays the same.

How does higher expected revenue growth generally affect Equity Value and Enterprise Value?

Both generally increase because the company’s Assets and core operations become more valuable.

Which tends to change more from an operational change: Enterprise Value or Equity Value?

Enterprise Value generally changes more because it is affected only by operational changes.

Which tends to react more directly to your revised operating assumptions: Current or Implied Enterprise Value?

Implied Enterprise Value.

Why doesn’t a Debt-funded increase in Cash raise Equity Value?

The Asset increase was funded by non-equity investors, so the value does not belong to common shareholders.

What is a valuation multiple?

A shorthand way to express company value relative to a financial or operating metric.

What does a valuation multiple summarize conceptually?

The effects of cash flow, cash flow growth, and the Discount Rate on value.

Is a valuation multiple meaningful by itself?

No. It is meaningful only relative to comparable companies or other relevant benchmarks.

What is the most common real-world use of valuation multiples?

Comparing a company with similar public companies.

How can a P / E multiple be interpreted as a yield?

Its inverse approximates the earnings yield; for example, 10x P / E implies about a 10% earnings yield.

How should you interpret the yield concept for an Enterprise Value-based multiple?

As a return on the company’s entire capital structure rather than only its shares.

What future assumption can valuation multiples help you infer?

The market’s implied Free Cash Flow growth rate.

Which operating growth metric is most likely to correlate with EV / EBITDA?

EBITDA growth.

Why is EBITDA growth more closely related to EV / EBITDA than revenue growth?

EBITDA growth is closer to cash flow growth than revenue growth is.

Do EBITDA margins strongly affect valuation multiples if the margins are unchanged?

Not necessarily. Changing margins matter more because they affect growth.

Which multiple is more directly related to revenue growth?

EV / Revenue.

Why can EBITDA growth and valuation multiples show weaker correlation than expected?

EBITDA growth can differ significantly from Free Cash Flow growth.

Why can different Discount Rates weaken the relationship between growth rates and valuation multiples?

Companies with different risk levels can deserve different multiples even with similar growth.

Can non-financial factors affect valuation multiples?

Yes. Legal issues, products, executives, strategy, and competitive developments can all affect value.

What is a common reason one peer trades at a higher EV / EBITDA multiple than another similar peer?

The market may expect its cash flows to grow faster.

Is a lower valuation multiple automatically better for an investor?

No. You must compare it with peers and the company’s growth and risk profile.

Can P / E or EV / EBITDA be negative?

Yes, if the denominator such as Net Income or EBITDA is negative.

Can a Revenue-based valuation multiple be negative?

No. Revenue can be zero but generally cannot be negative.

What does a negative valuation multiple usually mean?

That the multiple is not meaningful for valuing the company.

Why should Equity Value normally be paired with Net Income to Common rather than Net Income when Preferred Stock exists?

The numerator and denominator must refer to the same investor group.

What is a “half-pregnant” valuation multiple?

A mismatched multiple whose numerator and denominator represent different investor groups.

What is the key matching rule for valuation-multiple numerators and denominators?

If the denominator excludes an expense, the numerator should include the corresponding Balance Sheet claim, and vice versa.

Why are EBIT and EBITDA often used instead of CFO or FCF in valuation multiples?

They are easier to calculate and more comparable across companies.

Why can CFO and FCF be difficult to compare across companies?

Items such as Deferred Taxes, Stock-Based Compensation, and Working Capital can vary significantly.

When is EV / EBITDA especially useful?

When you want to exclude capital structure, Depreciation, and the impact of CapEx more completely.

When is EV / EBIT especially useful?

When you want to exclude capital structure but partially reflect Depreciation and CapEx.

Why is EV / EBIT often useful for manufacturing companies?

Depreciation and CapEx are important value drivers in capital-intensive businesses.

What are major drawbacks of the P / E multiple?

It is affected by tax rates, capital structure, non-core activities, and other below-the-line items.

In which industries can P / E be especially relevant?

Commercial banks and insurance firms, where interest income and expense are core to the business.

What is the main advantage of Unlevered FCF?

It is capital structure-neutral.

Why is Unlevered FCF often easier to calculate than other FCF measures?

It excludes financing effects such as interest and Debt repayment details.

When would you use FCF or Levered FCF instead of Unlevered FCF?

When you want the cash flow measure to reflect the company’s capital structure.

What additional financing item does Levered FCF typically include?

Mandatory Debt principal repayments.

Which FCF measure is most commonly used in a DCF?

Unlevered FCF.

Where is standard FCF more commonly used?

Standalone financial statement analysis.

Why is Levered FCF relatively rare in DCF analysis?

It is harder to calculate, less reliable, and there is disagreement over its exact definition.

What is EBITDAR?

EBITDA plus Rental Expense.

How should Enterprise Value be adjusted when using EV / EBITDAR?

Capitalize operating leases and add the capitalized lease value to Enterprise Value.

Why must operating leases be capitalized for EV / EBITDAR?

Because EBITDAR adds back Rental Expense, so the numerator must reflect the corresponding lease obligation.

Can Levered FCF ever exceed Unlevered FCF?

Yes, if Net Interest Expense is negative and Debt principal repayments are minimal.

What does negative Net Interest Expense mean?

Interest Income exceeds Interest Expense.

If EBITDA decreases, what usually happens to Unlevered FCF and Levered FCF?

Both usually decrease because Operating Income is lower.

Can FCF remain unchanged even if EBITDA decreases?

Yes, if changes in D&A, Working Capital, or CapEx offset the decline in Operating Income.

What is a standard formula for Unlevered FCF starting from EBIT?

EBIT × (1 – Tax Rate) + Non-Cash Adjustments + Changes in Working Capital – CapEx.

What is a standard formula for Unlevered FCF starting from EBITDA?

(EBITDA – D&A) × (1 – Tax Rate) + Non-Cash Adjustments + Changes in Working Capital – CapEx.

What is a standard formula for Unlevered FCF starting from CFO?

CFO – tax-adjusted Net Interest Expense and other items between Operating Income and Pre-Tax Income – CapEx.

Why is it correct to exclude the interest tax shield when calculating Unlevered FCF?

Unlevered FCF excludes all effects of capital structure, including both interest expense and its tax benefit.

What would happen if you included the tax benefit of interest in Unlevered FCF?

You would also need to include the interest expense, which would turn it into a levered cash flow measure.

Can EV / EBITDA ever equal P / E?

Yes. There is no rule preventing the two multiples from being equal.