Assume that all we know about a fictional company is below:
Market cap = 100
Therefore...equity value = 150, EV = 50
How could it ever be the case that Equity value and EV differ like this? What am I misunderstanding?
How Can EV be Smaller than Equity Value?
Yes - EV can be less than equity value if net debt is negative. Net debt is calculated as total debt minus cash. If your cash balance is larger than the debt of the business, preferred shares and minority interest of the company combined then you will have an EV smaller than your equity value. This is not uncommon for profitable businesses without debt.
What is Enterprise Value?
Enterprise Value (also known as EV) is a metric that attempts to reflect the market value of a firm. It can be used as an alternative to market capitalization.
Essentially, enterprise value attempts to provide a more accurate valuation for a buyer. While a firm's market capitalization will indicate share price x share quantity, the firm may have a lot of debt which the acquirer would need to pay off (thereby adding the price of the transaction).
The calculation for enterprise value is: Market Capitalization + Debt + Minority Interest + Preferred Shares - Cash & Cash Equivalents
What is Equity Value?
Equity value is another term for market capitalization and can be calculated as share price x shares outstanding.
How to Get From Enterprise Value to Equity Value?
Enterprise value + cash & cash equivalents - debt - minority interest - preferred shares will equal equity value.
Preparing for Investment Banking Interviews?
The WSO investment banking interview course is designed by countless professionals with real world experience, tailored to people aspiring to break into the industry. This guide will help you learn how to answer these questions and many, many more.