11 terms

Enterprise Value (Old)

What is the difference between enterprise value and equity value?
Enterprise Value: represents the value of the operations of a company attributable to all providers of capital. Also helpful to think of Enterprise value as the takeover value. The main use for enterprise value is to create valuation ratios/metrics (e.g. EV/Sales, EV/EBITDA).

Enterprise value = Market cap + Debt + Minority interest + Preferred shares - Total cash and cash equivalents.

Enterprise value = Market cap + Total Debt - Cash and Cash Equivalents

Equity Value: a component of enterprise value and represents only the proportion of value attributable to shareholders.
Why do we look at both Enterprise Value and Equity Value?
Bc Equity Value is the number the public-at-large sees, while Enterprise Value represents the true value of the company.
Why do you subtract cash in the enterprise value formula?
1. Cash is considered a non-operating asset

2. Cash is already implicitly account for within equity value.

This is the amount the takeover company pockets.
What is minority interest and why do we add it in the enterprise value formula?
Whenever a company owns over 50% of another company, it is required to report the financial performance of the other company as part of its own performance.

So even though it doesn't own 100%, it reports 100% of the majority-owned subsidiary's financial performance.

In keeping with the "applet-to-apples" theme, you must add Minority Interest to get to Enterprise Value so that your numerator and denominator both reflect 100% of the majority-owned subsidiary.
Why do we add Preferred Stock to get to Enterprise Value?
Preferred Stock pays out a fixed dividend, and preferred stock holders also have a higher claim to a company's assets than equity investors do. As a result, it is seen as more similar to debt than common stock.
How do you account for converitble bonds in the Enterprise Value formula?
If the convertible bonds are in-the-money, meaning that the conversion price of the bonds is below the current share price, then you count them as additional dilution to the Equity Value

If they're out-of-the-money then you count the face value of the convertibles as part of the company's Debt
How do you calculate the market value of equity?
MVE = Share Price * Number of Fully Diluted Shares Outstanding
What's the difference between Equity Value and Shareholders' Equity?
Equity Value is the market value; this value can never be negative.

Shareholders' Equity is the book value; this could be any value.

For healthy companies, Equity Value usually far exceeds Shareholders' Equity.
What is the difference between basic shares and fully diluted shares?
Basic shares: the number of common shares that are outstanding today.
Fully diluted shares: basic shares + potentially dilutive effect from any outstanding stock options, warrants, convertible preferred stock or convertible debt.
How do you calculate fully diluted shares?
FDS = Basic number of shares + Dilutive effect of employee stock options
To calculate the effect of options, we typically use the Treasury Stock Method. The concept of the treasury stock method is that when employees exercise options, the company has to issue the appropriate number of new shares but also receives the exercie price of the options in cash.
How do we use the Treasury Stock Method to calculate diluted shares?
1. Tally the company's issued stock options and weighted average exercise prices (from the company's 10K)
If using for precedent transactions or M&A analysis, we will use all of the options outstanding.
If our calculation is for a minority interest based valuation (comparable companies) we will use options exercisable. Options exercisable are options that have vested while options outstanding takes into account both options that have vested and that have not yet vested.

2. Subtract the exercise price of the options from the current share price (or per share purchase price for an M&A analysis), divide by the share price (or purchase price) and multiply by the number of options outstanding. Repeat for each subset of options reported in the 10K.

3. Aggregate to get the amount of diluted shares. Options where the exercise price is greater than the share price then the options are out of the money and have no dilutive effect.