Calculating Enterprise Value
Using the equation,
EV = Market Value of Equity + (Total Debt + Capitalized Leases - Cash & Equiv) + Minority Interest + Preferred Equity
Can someone explain the addition of Minority Interest? And how this arises?
Also, how often does a company have Capitalized Leases? Will they be appear seperately on the BS?
Capitalized leases will be a footnote in the company's financial statements. Usually, they are kind enough to even capitalize them for you in the footnote, although sometimes you have to capitalize them yourself.
There are specific rules when companies HAVE to capitalize leases. If any of the following occur, the company must capitalize their leases:
Edit: Also, these types of leases are VERY common, especially in the retail and manufacturing space. Some companies (Home Depot, McDonalds, Target) are very shady about this, so it's quite important to capitalize their operating leases.
I've never dealt with minority interests, so I'll let someone else answer that.
The first two are correct, but these are the other two:
re minority interest, see the following: http://www.ibankingfaq.com/interviewing-technical-questions/what-is-min…
EV question-need guidance (Originally Posted: 12/16/2013)
If a firm had 500mm of Equity, 500mm of Debt, and 100mm of cash, what is enterprise value. If the firm were to take that 100mm of cash and buy back equity with it, what would the new firm value be? -would it be originally 900mm new EV: 1000 (less cash increases EV, but buying back shares doesn't affect equity value only decreases outstanding shares and makes earnings more Accretive?)
Correct as far as I can tell
any other feedback or assurance??
I think it's correct in terms of the math, but as far as I know, a share repurchase tends to be seen as a bullish indicator of sorts and often results in an increase of share prices, so the market cap figure used in the EV calculation would probably increase somewhat.
think the enterprise value = 900 in both cases
theoretical/corp finance response -- if you repurchase 100 of shares it will not affect enterprise value - remember, enterprise value = the value of a firm independent of its capital structure
math response -- lets say share price = $10 and there are 50 shares outstanding pre-buyback
pre-buyback enterprise value = 900 = 500 equity (50 shares at $10 / share) + 500 debt - 100 cash
in the buyback, 100 cash will be used to repurchase 10 shares for $10 / share
post buy-back enterprise value = 900 = 400 equity (40 shares at $10 / share) + 500 debt
**this is assuming there is no share price reaction to the buyback, obviously..
SB'd, totally forgot the effect of reduction in shares outstanding on market cap.
The link from the poster above is very correct.. but just to add.
% minority stake are interests owned in another company. Typically, before a conglomerate acquires another target, they usually partner with the target by way of a JV, an alliance, a joint marketing or product development effort. In order to solidify this relationship, both sides usually take stakes in each other. This also helps both sides get more familiar with the operations, management, etc. of the other party.
It also serves as a signal to let their own SHs know that they are considering an outright takeover to bolster their market position. The hope is that b/w now and the transaction (if ever), the markets reward the move now with a premium.
Sponsors such as Sun Capital also do the minority stake thing, but eventually they buy out their targets if the investment is worthwhile like in the hostile takeover of Kellwood and their recently rejected bid for Furniture Brands. In both cases, they built minority positions before making full bids for their remaining stakes.
Valuing the minority stake (under 50%) is as simple as valuing the subsidiary and backing out debt from a DCF BEV to get equity value and multiplying that # by % stake, or using the latest market cap * % stake (for equity value), or even using a good EV/whatever multiple for subco, and then backing out subco debt to get the equity value of subco, and then multiplying equity value by % stake. It all depends on the information you have and the size of the stake, and the purpose of the valuation (deal pricing, financial reporting, what the client wants to do, etc).
Companies do it differently, but the recent stock price is your best bet for financial reporting especially if the stake is held for "sale" , or for "trading". If it is classified as "held till maturity", the value may not reflect latest market cap, so you may have to get latest prices.
For balance sheet purposes, depending on the size of the stake, the accounting is a little different. Stakes less than 50% are not consolidated, but are shown as financial assets on asset side of B/S.
When you have a majority stake in a subco (> 50%) there is consoildation of subco and parent as per GAAP, and there is another kind of minority interest on Liability Side - which is the % of a subsidiary not owned by the majority stake holder in the subsidiary. E.g News Corp takes a 60% stake in Yahoo!
In such cases, since the statements are actually consolidated, I prefer to separate subsidiary from the parent and value them separately to get equity value of both, if I have sufficient data.
But like the above poster said, if you are just creating a comp spread, to compare apples to apples, add in the minority interest (shown on liability side) to your numerator and divide by the consolidated sales/EBITDA to get your multiple.
EV calculation help - debt for commercial bank? (Originally Posted: 06/28/2011)
Hi,
Can someone help me out? I'm struggling a bit. When calculating the enterprise value of a commercial bank, is debt equivalent to the total customer deposits? I'm looking at the balance sheet of this bank, and it has something called "Customers' deposit" on the liabilities side. I just need to find out whether I need to include this in the EV calculation?
Thanks
makes sense that it would be a proxy for liabilities. If no other line items are available on the balance sheet other than customer deposits, then thats the only component of debt when calculating EV.
http://pages.stern.nyu.edu/~adamodar/pdfiles/valn2ed/ch21.pdf
As it says in there it will serve you better to look at valuing the equity rather than the enterprise itself as banks are valued much differently than other types of companies.
thanks all.
EV does not apply to commericial banks, given their unique balance sheets and mix of financing and operating activities.
apply the dividends discount model or residual income to get your equity value remember to take in consideration of capital adequacy requirement when you're applying the DDM
Thanks a lot. No one knows how to value bank at my firm that I'm interning now, and I want to do a good job. Are the methods above the standard in valuing bank?
Calculating EV - Do you remove Off Balance Sheet Assets (Originally Posted: 03/31/2010)
Calculating EV - Do you remove/net out Off Balance Sheet Assets
interesting question but I don't think one would normally do so. I mean supposedly there are reasons to back the why certain items are "off balance sheet" aka not considered as part of the firm's value or has no claim on the firm's assets
likely the reason why. i saw it in a BB's multiple calculations (analysis of selected multinational organizations)
What "off balance sheet assets" are you talking about?
Any off-balance sheet assets or liabilities that have a claim on the firm's cash flows SHOULD be included in your EV calculation.
The extent to which the off-balance sheet items affect EV, clearly depend on the characteristics of the items (can be tricky to estimate).
EV Question - Enterprise values (Originally Posted: 01/11/2013)
Morning all, I was just going over enterprise values (work in derivs so haven't used it for a while)
As I understand it you have the value of diluted equity + net debt + minority interests.
If anyone can clear the following up, I would be quite greatful....
1) Company A and B have same equity value (100) and B has 5x the debt of company a (lets say 500 vs 100), assuming no minorities, A has an EV of 200 and B has EV of 600.
They make the same net proft of lets say 10
Company A's EV/EBITDA is 200/10 = 20x B's is 600/10 = 60x
So, I guess lower EV/EBITDA is better
Also, what are the drawbacks of this metric?
Cheers all
The differences in the EBITDA multiples can explained by differences in industries, margins, growth, etc. Generally, higher multiples across a standardized comp set is better. Here we can be comparing two very different companies (e.g. tech startup vs. retail company)
this is a benefit and a drawback - you ignore capital structure...
EBITDA also gets messy when you're comparing firms which either rent or buy against each other. Stating the obvious here but i'll do it anyway, if the firm rents, the cost'll be an operational cost (lower EBITDA), if the firm buys, it'll be on the income statement via D&A, and hence taken out in EBITDA (higher EBITDA).
and so, EBITDAR is common.
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