Equity to Enterprise
Value
$
Calculating Equity Value
2
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No. of shares at the end of the period
TRADED
SHARE PRICE
$
NUMBER
OF SHARES
$
=
EQUITY
VALUE
$
Diluted no. of shares
Also know as market value or market capitalization (traded company)
$
Enterprise Value Bridge
2
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ASSET VALUE
FINANCING
Mortgage
300,000
House
500,000
Equity Value
200,000
ASSET VALUE NOT AFFECTED BY FINANCING
Debt
Cash
Value of Operating Business
$
Net Debt
Value of Shares
Enterprise Value
Equity
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Cash
$
Debt
Value of Operating Business
Value of Shares
Enterprise Value
Equity
$
The Valuation Bridge
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Enterprise Value
Trading Comparable
Transaction Comparable
$
Value of a company’s
net operating assets
Equity to Enterprise Value
Enterprise to Equity Value
Net Debt + Equity Value = Enterprise Value
Enterprise Value – Net Debt = Equity Value
$
$
Net Debt
Net Debt
Enterprise Value
Enterprise Value
Equity Value
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The Bridge – Calculating EV and Equity Value
Derive from bridge
$
OR
Net Debt
Calculate from
multiples or DCF
Enterprise
Value
OR
Equity Value
$
Derive from bridge
Calculate from
share price
Relative Valuation
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Equity Value
Enterprise Value
$
Total operating assets minus
total operating liabilities
Total assets minus total liabilities
Ownership focus
Operating focus
$
$!
Affected by financing decisions
Unaffected by financing decisions
Driven By
Driven By
Company Performance
Company Performance
Industry Dynamics
Industry Dynamics
General Economic Factors
General Economic Factors
Financing Decisions
$
EV & Equity Multiples
2
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EV and EBIT are thus joined together
Value consistent
with value driver
Value
Value Driver
1,000.0
EV
Multiple
100.0
EBIT
Cash
100.0
Interest Income
1.0
Debt
(300.0)
Interest Expense
(15.0)
Tax Expense
(25.8)
800.0
Equity
No Shares
How much investors
pay in relation
to a value driver
100.0
8.0
Price
EV/EBIT
10.0 x
P/E
13.3 x
60.2
Net Income
100.0
No shares
0.60
EPS
$EV & Equity Multiples –
Range of Multiples
2
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Enterprise Multiples
Equity Value Multiples
EV / EBIT
PE
Common
EBITDA is closer to “cash” and
reduces accounting differences
and M&A accounting issues
EV / EBITDA
EV / REVENUES
Use revenues for context
Use price to book for balance
sheet driven companies
PRICE / BOOK
$
The Impact of Leverage
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High Levels Of Debt
High Levels Of Cash
VALUE
EV
Cash
800.0
Debt
0.0
Equity
RATIO
VALUE DRIVER
1,000.0
1,800.0
No shares
100.0
Per share
18.0
EBIT
100.0
VALUE
10.0 x
EV
Interest income
8.0
Cash
Interest
expense
0.0
Debt
Tax expense
(32.4)
Net income
75.6
No shares
100.0
EPS
0.8
23.8 x
RATIO
VALUE DRIVER
1,000.0
0.0
(800.0)
EBIT
100.0
Interest income
10.0 x
0.0
Interest
expense
(40.0)
Tax expense
(18.0)
Equity
200.0
Net income
42.0
No shares
100.0
No shares
Per share
2.0
100.0
EPS
0.4
4.8 x
In both cases, the business is the same
$
$
Only the capital structure changes
EV multiples remain unchanged
PE multiples change dramatically
$
The Bridge – More Detail
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Assets not valued by the DCF
or multiples process
$
Non-Core Assets
Net Debt
Debt like claims
Debt Equivalents
Shareholders in a subsidiary
NCI
Enterprise Value
Equity
$
Impact of Leverage
on Multiples
2
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In both cases, the
business is the same
$
Only the capital
structure changes
High levels of cash
Value
EV
1,000.0
EBIT
Cash
800.0
Interest Income
Debt
0.0
Interest Expense
Financing mix (capital
structure) affects equity
multiples, not EV multiples
$
100.0
0.0
1,800.0
Net Income
75.6
No. Shares
100.0
No. Shares
100.0
Per Share
18.0
Equity
EPS
EV
0.8
Value Driver
1,000.0
EBIT
23.8x
Ratio
100.0
Cash
0.0
Interest Income
0.0
Debt
(800.0)
Interest Expense
(40.0)
Tax Expense
(18.0)
Equity
200.0
Net Income
42.0
No. Shares
100.0
No. Shares
100.0
Per Share
2.0
EPS
10.0x
8.0
(32.4)
Value
High levels of debt
PE multiples change
dramatically
Ratio
Tax Expense
EV multiples remain
unchanged
%
Value Driver
0.4
10.0x
4.8x
Impact of Growth &
Returns on Multiples
2
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Higher ROC
produces
more value
Lower WACC
produces
more value
Base
High ROC
High Growth
Low WACC
Return = WACC
100.0
100.0
100.0
100.0
100.0
Return on Capital (ROC)
11.0%
15.0%
11.0%
10.0%
10.0%
WACC
10.0%
10.0%
10.0%
8.0%
10.0%
Growth (g)
3.0%
3.0%
6.0%
6.0%
6.0%
EBIAT = IC x ROC
11.0
15.0
11.0
10.0
10.0
EV = EBIAT x (1 – g / ROC) / (WACC – g)
114.3
171.4
125.0
200.0
100.0
Multiple
10.4x
11.4x
11.4x
20.0x
10.0x
Invested Capital (IC)
Higher
growth
produces
more value
Growth
irrelevant
because
ROC = WACC
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