Enterprise Value. Enterprise value (EV), also called firm value or total enterprise value (TEV), tells us how much a business is worth. You can calculate enterprise value using a number of valuation techniques like discounted cash flow (DCF) analysis, but for now we'll simply calculate EV as follows: EV = Equity Value + Net Debt + Noncontrolling Interest + Preferred Stock + Capital Leases. Enterprise value is the theoretical price an acquirer might pay for another firm, and is useful in comparing firms with different capital structures since the value of a firm is unaffected by its choice of capital structure. Equity Value. A public company's equity value, or market capitalization, is shareholders' residual interest after paying off all senior claims such as debt and preferred stock. It is calculated as the current share price multiplied by the number of diluted shares outstanding. To calculate diluted shares, you need to first find the number of basic shares on the front of the latest company SEC filing (e. Add to that number any restricted shares and net shares resulting from the exercise or conversion of options, warrants, and convertible securities to get diluted shares outstanding. The net share equivalents resulting from the exercise of options is calculated using the treasury method: Assumes that proceeds from the exercise of options are used to repurchase shares at the current market price. Net share equivalents = options . Only in- the- money (ITM) convertible securities impact diluted share count. UVA-F-1274 This note was prepared by Susan Chaplinsky, Professor of Business Administration, and Michael J. Schill, Assistant Professor of Business Administration, with the assistance of Paul Doherty (MBA ’99). If the current stock price is greater than the conversion price, the convertibles are ITMITM convertible securities increase the number of shares outstanding by the amount of new shares issued upon conversion. New shares issued = face value of ITM convertibles . When calculating total debt, be sure to include both the long- term debt and the current portion of long- term debt, or short- term debt. Any in- the- money (ITM) convertible debt is treated as if converted to equity and is not considered debt. When calculating cash and equivalents, you should include such balance sheet items as Available for Sale Securities and Marketable Securities, even if they are not classified as current assets on the balance sheet. Do not include restricted cash in this calculation. Restricted cash is not often explicitly identified on the balance sheet, but can be estimated as a percent of cash and equivalents depending on the industry, for example. In practice, however, we generally ignore restricted cash unless it is explicitly identified on the balance sheet or elsewhere in company filings. Calculate enterprise value as the sum of equity value, net debt, minority interest, preferred stock, and capital leases. Business Valuation Resources 1000 SW Broadway, Suite 1200 Portland, OR 97205 Phone: 1-503-291-7963 Fax: 1-503-291-7955 Email: [email protected]. The market value of debt should be used in the calculation of enterprise value. However, in practice we can usually use the book value of the debt by assuming that the debt trades at par. This assumption would be inappropriate in the valuation of distressed companies, whose debt will trade significantly below par. In practice, noncontrolling interest, preferred equity not convertible into common stock, and capital leases are sometimes bundled into the net debt calculation. We will assume net debt includes these components when we refer to it in our coverage of valuation topics. Noncontrolling (Minority) Interest. Noncontrolling interest, formerly known as minority interest, represents the interest of noncontrolling shareholders in the net assets of a company and is reported in the shareholders' equity section of the balance sheet (or in the . For example, a parent company might have an 8. If noncontrolling interest is excluded from the calculation of enterprise value, the consolidated EBITDA, EBIT, etc. Liquidation value is the amount the firm must pay to eliminate the obligation. Example A – Calculating Enterprise Value. Tango's balance sheet and options table on 3/3. Shareholders' equity includes $7. What is Tango's enterprise value? Example B – Calculating Enterprise Value. Tango's balance sheet on 3/3. Assume the options table from Example 5. The zero- coupon convertible debt has a conversion price of $2. Tango has no noncontrolling interest. What is Tango's enterprise value at its current stock price and theoretical acquisition prices of $2. Note that equity value and net debt will change depending on whether or not the convertible debt is in- the- money. The Way Ahead- Home - Academia. July 2. 01. 6Mohsen Ahmadian, David Chapman, Carla Nelson- Thomas, Jay Kipper, and Scott Tinker, Advanced Energy Consortium, Bureau of Economic Geology, University of Texas at Austin.
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