Does the EV-Fomula actually make sense?
Does calculating EV via EV = total debt + equity + preferred stock - cash & cas eq. actually make sense? Considering a company that has a market cap of 200MM, no debt, and a cash balance of 200MM. Would this imply that the company is worth zero?
Do you actually ever calculate an EV like that in the real world? Or would you instead either apply a comps multiple to EBITDA or do a DCF? I mean, if a formula breaks so easily, its significance seems very low.
You need to understand the concepts better before jumping to the conclusion that everyone is throwing around formulas that make no sense. It’s not entirely your fault: 90% of the interview materials out there do a horrendous job of explaining this concept.
Enterprise value is the market value of a company’s operating assets. Equity value is the market value of the company’s total assets, less the debt and debt-like claims on the assets. If a firm has $200 in cash funded by $100 of debt and $100 of equity, it has an enterprise value of $0 because (excess) cash is not an operating asset.
Beyond that, you need to do more work on the topic before engaging other people for help. Good luck
Listen, if I'd tell you how much I've already read on this, it'd probably get very embarrasing. However, thanks alot cause the penny just dropped.
Yes that company is worth zero because its trading at its cash value. It implies that the business - the enterprise - is worthless.
You are doing a good job coming up with extreme examples to better understand concepts. But you aren’t doing a good job analyzing the example.
You could come up with that example just by transferring 200mm into a bank account and calling that bank account a company. Clearly the “company” doesn’t actually do anything so it has an EV of 0
Sit dolor quis saepe assumenda natus velit eaque in. Error illum ipsam nesciunt itaque quidem tenetur nisi molestiae. Vero totam ipsa in quia.
Enim id quia ut optio autem et enim. Est laboriosam earum laborum atque impedit. Est dolorum dolor nihil nostrum alias. Iure similique unde blanditiis sit. Voluptatem quos quo vero ratione nihil explicabo.
Non voluptatibus explicabo id quod odio numquam. Enim nobis sed sit excepturi exercitationem.
Aliquam eveniet illo totam sint neque. Cupiditate maxime in saepe perspiciatis. Sunt dolores eveniet explicabo repudiandae ut ratione eum quia. Amet labore omnis quia earum praesentium et.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...