Comments (29)

Jul 3, 2013 - 12:15pm

Was under the impression that EV uses market cap which is different than SH equity?

"History doesn't repeat itself, but it does rhyme."
Jul 7, 2013 - 6:51am

as always, well done.

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Aug 3, 2013 - 12:52pm

M&A Question - Market cap or ev as valuation tool (Originally Posted: 07/07/2011)

Hi I have a quick question on public companies and whether I should be using market cap or ev as a valuation tool.
For example Company A wants to acquire Company B
Company B Mkt Cap is 50 M
EV: 75M
To acquire the company (premium aside) will company A need to pay 50 or 75M. Does the debt outstanding carry over or does it have to be paid down immediatley.

What happens if the MKT is really low do to high amounts of cash?

Aug 3, 2013 - 12:53pm

Depends on the debt. Sometimes it will have to be taken out, other times it can be left in place.

"What happens if the MKT is really low do to high amounts of cash?"

Not sure what this means.

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Aug 3, 2013 - 12:54pm

What happens if MKT CAP is really low due to cash on hand?
IE If Company B's EV is 30M. But MKT CAP is 50M? Does Company A pay 30M or 50M?

Aug 3, 2013 - 12:55pm

-I don't think market cap has anything to do with the amount of cash on a firm's book...unless you're saying that the OPMI market is somehow less interested in the firm b/c of this and they its price is depressed, so market cap being simply shares outstanding x current market price would be low... yielding a low market cap valuation

-I think what you're actually getting at has to do with confusion over the Enterprise Value calculation which is: Market Cap (shares outstanding x current price) + Debt + Preferred - Cash & Cash Equivalents

-It's not that the market cap is low in this case its that EV since you don't want to count cash is less

-So keeping in mind what EV and what Market Cap each represent I'm fairly certain you would pay for EV * Premium in order to get shareholder's to participate from this valuation you can back out of EV * Premium to get Equity Value and then divide by Shares Outstanding to get what you would offer per share based on your valuation...

-Hope this helps, someone correct me if I'm wrong; don't want to sound like an arrogant prick if I am.

'Before you enter... be willing to pay the price'
Aug 3, 2013 - 12:56pm

Deleted. Sorry didn't read the above post.

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Aug 3, 2013 - 12:57pm

I think when we do the M&A valuation, we usually use EV/EBITDA. While if we just value whether we should buy the stock or not, we only care market cap as it just represents the equity part.
Other than EV/EBITDA, we shd also look at the net debt position when we finalise the acquisition price of the target.

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Aug 3, 2013 - 12:58pm

Equity Price is the price you pay to buy the company.

Think of it like if you wanted to buy the company; you would go to the market and buy stock @ the current stock price.

Now, the difference is that if you are trying to acquire 100% of the company you will have to pay a premium so that current shareholders will sell all their shares to you.
Aug 3, 2013 - 12:59pm

Equity Price is the price you pay to buy the company.

Think of it like if you wanted to buy the company; you would go to the market and buy stock @ the current stock price.

Now, the difference is that if you are trying to acquire 100% of the company you will have to pay a premium so that current shareholders will sell all their shares to you.
Aug 3, 2013 - 1:00pm

Market Cap. and Enterprise Value (Originally Posted: 08/14/2009)

If enterprise value is the true measurement of a firm's value, why do so many reports / investors quote market capitaliation as the correct metric for firm value and size?

Why is market capitalization ever a relevant metric in itself? Shouldn't we always look at enterprise value to measure the relative size of a company?

Aug 3, 2013 - 1:01pm

Total Enterprise Value is at its most important for M&A transactions and can take a little extra legwork to solve (need the debt and cash balances as well). Not that this legwork is really that time-consuming, but mark. cap. is just a quick and easy way to get things done. Plus, certain financial ratios need the market cap rather than TEV.

Aug 3, 2013 - 1:02pm

Right, but if market cap ALWAYS (unless the firm has no debt or cash) misstates the true value of a firm, I just don't understand why it is so widely used.

Simplicity alone shouldn't justify using it as the lone metric of value.

Aug 3, 2013 - 1:03pm

Enterprise value is not accurate if you are a shareholder. Market cap is simply the value of all common shares (shares X price). Market cap is the true value of the EQUITY portion of the firm. EV is theoretically the true value of the ENTIRE firm, but that does not matter because as a share holder you are only entitled to the equity portion.

Aug 3, 2013 - 1:04pm

Enterprise value is essentially the value to ALL STAKEHOLDERS of the firm. Equity Value/Market Cap is the value of common equity. In order to acquire CONTROL of a firm, you need control of a majority of common equity.

Aug 3, 2013 - 1:05pm

But aren't shareholders the ones who should care about enterprise value since, as residual claimholders, they need to take into account the amount of debt that their company carries.

It appears to me that only looking at market cap as a shareholder can be misleading if the company also carries a large burden of debt.

Even in M&A situations, where looking at enterprise value is common, the buyer technically becomes the majority shareholder.

Aug 3, 2013 - 1:06pm

I do agree that EV is usually more important. Most of the situations I've seen, in order to fully acquire a company, debt covenants require that all debt must be 'taken out.'

There are also situations where companies have nominal amounts of debt and it makes more sense to focus on market cap.

Aug 3, 2013 - 1:08pm

Enterprise value = EV + Debt + Preferred Stock + NCI - Cash (this is not all inclusive but covers the most common components of enterprise value)

You can have a negative enterprise value if cash is high relative to the other components of enterprise value. Most notably, a company with significant cash and an extremely low equity value (highly unusual) for obvious reasons).

Equity value cannot be less than 0 because a stock price has a zero bound.

Debt, PS and NCI must be 0 or a positive number.

Aug 3, 2013 - 1:09pm

How does a change in share price affect EV, P/E, and Market Cap? (Originally Posted: 11/24/2012)


I am not a finance major but I am prepping for some standard questions and wanted to double check.

If I was asked:

How does a share price drop of 10% affect
a) Enterprise Value,
b) P/E,
c) Market Cap?

a) It reduces Enterprise Value
b) Lowers P/E
c) Obviosuly reduces market cap by 10%

Am I correct here and can I be more precise with my answers?

Thank you

Aug 3, 2013 - 1:12pm

If I were the interviewer, I would expect an explanation demonstrating that you know what EV, P/E, and market cap are. Why do you believe EV would go down? Why do you think P/E would go down? Why is it that market cap would go down?

P.S. Never say obviously. If you're right, it makes you sound arrogant or like you're trying too hard. If you're wrong, it destroys your credibility. I've heard a lot of stupid statements coming along with the word "obviously".

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