Equity Value Basics

• Enterprise Value = value of the whole company (for all investors)

• Equity Value = value just for the shareholders

• Why both matter?

  • Equity Value is what people see in the stock market

  • Enterprise Value shows the company’s real value (including debt)

1. Enterprise Value is what an acquirer really pays to buy a company

2. It includes debt, because the buyer often has to repay it

3. Shows the true cost of acquiring the business

EV =

Equity Value + Debt + Preferred Stock + Noncontrolling Interest – Cash

• If a company owns over 50% of another, it must report 100% of that company’s financials

• Even if it owns only part, it still shows the full performance

• To keep things consistent ("apples-to-apples"), you must add Noncontrolling Interest to Enterprise Value

• This makes sure both the Enterprise Value and financial metrics reflect the same 100% ownership

• Start with the basic share count

• Add the effect of dilutive securities:

  • Stock options

  • Warrants

  • Convertible debt

  • Convertible preferred stock

• Use the Treasury Stock Method to calculate dilution from options

• Basic Equity Value = 100 shares × $10 = $1,000

• 10 stock options are in-the-money (exercise price < current price)

• Exercising them adds 10 new shares → total becomes 110 shares

• But: options cost $5 each, so company gets $50 cash

• Company uses $50 to buy back 5 shares at $10/share

• Net new shares = 10 issued – 5 bought back = 5 extra shares

• Fully diluted share count = 105 shares

• Fully diluted equity value = 105 × $10 = $1,050

• Equity Value = $1,000

• The options' exercise price is above the current share price

• That means the options are out-of-the-money

• So they have no dilutive effect – fully diluted share count stays the same

1. Cash is subtracted in Enterprise Value because:

   • It’s a non-operating asset

   • It’s already included in Equity Value

2. In an acquisition, the buyer gets the target’s cash, so they effectively pay less

3. Enterprise Value = true cost to acquire a company

4. In theory, you should subtract only excess cash (above what’s needed to run the business)

1. Debt is usually added to Enterprise Value because:

   • It’s typically paid off or refinanced in an acquisition

   • So it increases the effective purchase price

2. This rule is accurate in most cases

3. Exceptions exist, but they’re very rare

4. Key takeaway: Debt usually adds to what a buyer pays

• Negative Enterprise Value can happen when:

  • A company has a lot of cash, or

  • A very low market cap, or both

• You often see this in:

  1. Distressed companies (near bankruptcy)

  2. Financial institutions (like banks) – but EV isn’t typically used for banks anyway

• No

• you cannot have a negative share count

• you cannot have a negative share price

• Preferred Stock pays a fixed dividend

• Holders have a higher claim on assets than common shareholders

• Because of this, it’s treated more like debt than equity in valuation

Convertible bonds can be treated as equity or debt, depending on their status:

• In-the-money (conversion price < current share price):

  • Count as dilution to Equity Value

• Out-of-the-money (conversion price > share price):

  • Count as debt (use the face value)

• Equity Value = market value (share price × shares outstanding)

• Shareholders’ Equity = book value (from the balance sheet)

• Equity Value is never negative (price and shares can’t be negative)

• Shareholders’ Equity can be negative

• For healthy companies, Equity Value is usually much higher than Shareholders’ Equity

• Equity Value = market value (share price × shares outstanding)

• Shareholders’ Equity = book value (from the balance sheet)

• Equity Value is never negative (price and shares can’t be negative)

• Shareholders’ Equity can be negative

• For healthy companies, Equity Value is usually much higher than Shareholders’ Equity