Enterprise Value represents the value of the company stock is attributable to all investors; Equity Value only represents the portion available to shareholders equity investors. You look at both because Equity Value is the number the public-at-large sees, while Enterprise Value represents its true value. When looking at an acquisition of a stock, do you pay more attention to Enterprise or Equity Value? Enterprise Value, because that's how much an acquirer really "pays" and includes the often mandatory debt repayment. This formula does not tell the whole story, but most of the time you can get away with stating this formula in an interview, though. Take the basic share count and add in the dilutive effect of stock options and any other dilutive securities, such as warrants, convertible debt or convertible preferred stock. To calculate the dilutive effect of options, you use the Treasury Stock Method detail on this below. To calculate the dilutive effect of the options, first you note that the options are all "in-the-money" - their exercise price is less than the current share price. When these options are exercised, there will be 10 new shares created - so the share count is now rather than However, that doesn't tell the whole story. In this case the options' exercise price is above the current share price, so they have no dilutive options. Why do you subtract cash in the formula for Enterprise Value? Is that always accurate? Cash is subtracted because it's considered a non-operating asset and because Equity Value implicitly accounts for it. The way I think about it: In an acquisition, the buyer would "get" the cash of the seller, so it effectively pays less for the company based on how large options cash balance is. Remember, Enterprise Value tells us how much you'd really have to "pay" to acquire another company. It's not always accurate because technically you should be subtracting only excess cash -the amount of cash a company has above the minimum cash it requires to operate. Is it always accurate to add Debt to Equity Value when calculating Enterprise Value? In most cases, yes, because the terms of a debt agreement usually say that debt must be refinanced in an acquisition. And in most cases a buyer will pay off a seller's debt, so it is accurate to say that any debt "adds" to the purchase stock. However, there could always be exceptions where the buyer does not pay off the debt. These are rare and I've personally never seen it, but once again "never say never" applies. Could a company have a negative Enterprise Value? What would that mean? It means that the company has an extremely large cash balance, or enterprise extremely low market capitalization or both. You see it with:. Financial institutions, such as banks, that have large cash balances. These days, there's a lot of overlap in these 2 categories This is not possible because you cannot have a negative share count and you cannot have a negative share price. Preferred Stock pays out a fixed dividend, and preferred stock holders also have value 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 convertible 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 value the convertibles as part of the company's Debt. How do I calculate diluted shares outstanding? This gets confusing because of the different units involved. So we count them as additional shares rather than debt. Next, we need to figure out how many shares this number represents. The number of shares per bond is the par value divided by the conversion price:. We do not use the Treasury Stock Method with convertibles because the company is not "receiving" any cash from us. Equity Value is the market value and Shareholders' Equity is the book value. Equity Value can never be negative because shares outstanding and share prices can never be negative, whereas Shareholders' Equity could be any value. For healthy companies, Equity Value usually far exceeds Shareholders' Equity. High-profile finance, investment and advisory jobs. Job Search all words any of the words exact phrase none of the words. Jobs of the day. Investment Banking interview questions: Just make sure you enterprise all the relevant formulas and understand concepts like the Treasury Stock Method for calculating diluted shares. Why do we look at both Enterprise Value and Equity Value? What's the formula for Enterprise Value? Why do you need to add Minority Interest to Enterprise Value? How do you calculate fully diluted shares? You see it with: Value on the options of bankruptcy. Could a company have a negative Equity Value? Why enterprise we add Preferred Stock to get to Enterprise Value? The number of shares per bond is the par value divided by the conversion price: What's the difference between Equity Value and Shareholders' Equity? Interview Preparation IB Careers. Thank you for your feedback!
Equity Value vs. Enterprise Value and Valuation Multiples
Equity Value vs. Enterprise Value and Valuation Multiples
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