Comments (18)

Feb 1, 2009

EV is unlevered.

Feb 1, 2009

can you explain as well, cuz i thought when you calculate EV you will use WACC which factor in debt and levered CAPM..

Feb 1, 2009
ttran86hcm:

Could someone help me articulate this question: is EV of a company levered or unlevered...why? Plus, if PE of the acquirer higher than PE of the target in an all cash deal, would it be Accretive or not sure and required more info..thanks

Are you asking if the FCF associated with calculating theoretical EV is levered or unlevered?

Feb 1, 2009

thats exactly how people asked me...is EV levered or unlevered

Feb 1, 2009
ttran86hcm:

thats exactly how people asked me...is EV levered or unlevered

Bad question. EV is levered to the extent the BS is levered.

Feb 1, 2009

Excuse me if this is incorrect, but I'm pretty sure there's no WACC in EV. Just equity value, net debt, minority interest, and preferred's, right?

EV is unlevered because it does not depend on the capital structure of the firm. If capital is raised via equity, it is accounted for. If it is raised via debt, it is accounted for.

As for your second question, whether a deal is Accretive/dilutive for PE in an all-cash transaction depends on the interest income lost on the cash. If the interest income lost to acquire the company is less than the income of the target, it's Accretive; if interest income is greater, it is dilutive. At least I'm pretty sure that's how it works.

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May 18, 2018
rmande09:

Excuse me if this is incorrect, but I'm pretty sure there's no WACC in EV. Just equity value, net debt, minority interest, and preferred's, right?

EV is unlevered because it does not depend on the capital structure of the firm. If capital is raised via equity, it is accounted for. If it is raised via debt, it is accounted for.

As for your second question, whether a deal is Accretive/dilutive for PE in an all-cash transaction depends on the interest income lost on the cash. If the interest income lost to acquire the company is less than the income of the target, it's Accretive; if interest income is greater, it is dilutive. At least I'm pretty sure that's how it works.

Feb 1, 2009

Have you guys gotten any weird technical questions at all...please share

Feb 1, 2009

Isn't EV one valuation method and DCF using FCF a completely different method? EV = Enterprise Value, which does not take into account the capital structure. Therefore, unlevered. Am I missing something?

Feb 1, 2009
rmande09:

Isn't EV one valuation method and DCF using FCF a completely different method? EV = Enterprise Value, which does not take into account the capital structure. Therefore, unlevered. Am I missing something?

There are a few ways to bullshit this stupid question.

Theoretical EV is derived from unlevered FCF...so you can argue EV is "unlevered"

Actual EV includes debt so the EV is "levered" if the balance sheet has debt (i.e. EV includes debt so it's "levered")

Feb 1, 2009

I would assume they would be asking for actual EV.

And I am not seeing this. For a metric/measure to be levered, capital structure must effect it. EV will be the same regardless of how the company is set up - 100% debt, 100% equity, or somewhere in between. It doesn't matter if they raise $100 through equity placement or $100 through debt placement in EV calculation - it's all the same.

Feb 1, 2009

When people talk about EV they are talking about Enterprise Value calculated as equity value (Mrkt Cap) + Debt - Cash. So EV is levered Mrkt Cap unlevered.

Feb 1, 2009
stevenbn:

When people talk about EV they are talking about Enterprise Value calculated as equity value (Mrkt Cap) + Debt - Cash. So EV is levered Mrkt Cap unlevered.

I'm pretty sure it's the other way around. EV is not dependent on capital structure, thus unlevered, and market cap aka equity value is dependent on capital structure (equity) and is attributable to just equity holders, thus levered.

Oct 25, 2009

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  •  Feb 1, 2009

the way you calculate EV is by discounting your unlevered cash flows by wacc. Unlevered cash flows are cash flows to both debt and equity holders. That is the reason you discount them back wacc, because wacc reflects the riskiness of both cash flows to debt and equity holders.

Now when you discount unlevered cash flows you will get your EV, which is the total value of the firms debt and equity, more precisely Equity + Net debt+prefered+minority interest

when P/E of acquirer is higher than the targets P/E the merger will be accrutive. Because the acquirer is paying less per dollar of earnings than they have, so their EPS will rise.

Feb 1, 2009

Thats what the interviewer told me

Feb 1, 2009

EV is unlevered because it's the value of the firm attributable to both debt and equity holders. Since they both can contribute to capital it's not levered.

That's why you commonly see EV/EBIT, EBITDA, SALES, REVENUE because since these operating metrics come before interest it's capital structure independent.

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May 18, 2018
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