Enterprise Value the 30.000 Foot Overview

1. Definition:

   • Market Value: Represents the total equity value of a company (Market Capitalization = Share Price × Number of Outstanding Shares).

   • Enterprise Value (EV): Represents the total value of a company, considering both its equity and debt, minus cash and cash equivalents.

2. Components:

   • Market Value: Includes only the equity portion of the company's value.

   • Enterprise Value: Includes equity, debt, minority interest, preferred shares, and subtracts cash.

3. Inclusion of Debt and Cash:

   • Market Value: Ignores the impact of debt and cash on the company’s valuation.

   • Enterprise Value: Accounts for both debt (adding it) and cash (subtracting it).

4. Application:

   • Market Value: Used to measure the worth of shareholders' equity and for comparing companies based on stock market performance.

   • Enterprise Value: Used in valuation ratios (e.g., EV/EBITDA) to assess the entire firm, including its operational and financial obligations.

5. Perspective:

   • Market Value: Reflects the value of the company to equity holders only.

   • Enterprise Value: Reflects the value of the company to all stakeholders, including debt holders and equity investors.

• Debt

• Cash

• Minority interest

• Preferred Equity

Money that has been lent to the company by another person or institution. Debt holders have a higher priority than equity holders on the claims of the company’s assets and value, so they get paid first. In order to get to EV, we must add Debt to the Market Value of the company’s Equity.

• Cash could be used to pay off existing claimants, or stakeholders (Debt or buy back of shares)

• the higher the Cash balance a company has, the less its operations must be worth

• to get to EV, we must subtract Cash from the Market Value of the company’s Equity

Cash is often subtracted from Debt to get an important statistic called Net Debt.

Net Debt is the value of the Debt once balance sheet Cash has, hypothetically, been used to pay some of it off.

• MI represents the value of the partial ownership (by others) in this subsidiary, it should be treated like Debt – that is, in order to get to EV, we must add Minority Interest to the Market Value of the company’s Equity.

• (We should keep in mind, then, that this EV statistic will include the entire value of the company’s subsidiary, even though the Corporation itself does not own 100% of it.)

Preferred Equity: Despite the name, Preferred Equity primarily operates as Debt, not Equity. It is junior to all other forms of Debt, but it is also senior to the Equity (often called Common Equity or just “common.”)

Often, Preferred Equity can be converted to shares of Common Equity, hence the name. It may be convertible to Common Equity but, until that time, it receives interest and is in line ahead of the Common Equity in the capital structure, so it is “preferred” to the common shares.

It receives preferential treatment. Because Preferred Equity is actually primarily Debt unless and until it is converted to Equity, we must add Preferred Equity to the Market Value of the company’s (Common) Equity.