Enterprise value and equity value

Question

Most likely, my question is stupid and trivial, yet has caused confusion.

As far as I know, Enterprise value = equity value + Debt + Preferred stock + minority interest - Cash and cash equivalents

Net debt = Debt - Cash and cash equivalents

To rewrite the formula for the enterprise value: Enterprise value = Equity Value + Net debt + Preferred stock + Minority Interest

I can't understand why some sources state that Enterprise value equals equity value plus net debt.

ShooterMcGavin11 · Accepted Answer

There is no issue here. Your understanding is correct and it's really only a matter of detail. However, if I asked you in an interview what enterprise value means, and you answered "equity value plus net debt plus mi plus preferred stock plus capital leases plus excess pension liabilities minus equity interests minus NOLs," I'd only give you like 20% credit.

Spend more time worrying about conceptually what enterprise value actually means (i.e. the value of the operating assets based on the value of all the claims on the cash flows from those operatiing assets) than any single formula.

Timur-Sharapov · Answer

Even the CFA L2 Curriculum for some reason introduces the formula for unlevering beta without the tax shield (although the Curriculum for L1 includes one).

By the way, the same applies to WACC. corporate finance textbooks introduce the WACC formula without taking the tax shield into account. Several chapters later, however, it "magically turns out" that the more accurate formula has (1-t) due to the tax deductibility.

I couldn't understand the reason for introducing a formula that is not accurate enough in practice.

hominem · Answer

The interviewer is double counting. He should not be adding +100 in operating assets to the equity value because that is already being accounted for in the +100 change in net debt. New EV = 1,100 vs. Old EV = 1,000.

wolverine2000 · Answer

Its +$100.

When you raise $50 of debt, EV and FV stay the same because $50 debt is cancelled by $50 in cash.
When you use that $50 to buy an operating asset, you don't subtract $50 when going from EV to FV because that cash is now an operating asset. You don't add the operating asset on top again. Like hominem said, your interviewer is double counting.

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Enterprise value and equity value

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