Terminology confusion: enterprise value and value of operations
Say you are deriving equity value from Enterprise Value (EV). Many i-banking tech. interview guides as well as some posts on this website say the following:
EV + non-operating assets - net debt = equity value
But EV is what's available to every type of investors, so in case of liquidation, non-operating assets are also available to the investors. HUH? Then why are they doing EV + non-operating assets?
I'm reading Valuation written by McKinsey and here is what it says:
value of operations + non-operating assets = EV
Then,
EV - debt & debt equivalents - hybrid claims - minority interest = equity value
To me, consultants are the ones who got it right. What bankers call EV is actually more like value of operations. Or am I generalizing from my limited experience and most bankers actually do make the distinction? What do you guys think?
The reason I'm asking is, if a banker asks me what EV is at an interview, which definition am I supposed to describe?
EDIT
follow-up question:
According to the equations above, I'm guessing that the way McKinsey defined equity value is undiluted shares * price, since hybrid claims already include convertibles, options, etc. Why would McKinsey define equity value differently?
I hope that helps a little bit...
http://www.wallstreetoasis.com/blog/a-firms-value
[quote=corporateape]I hope that helps a little bit...
//www.wallstreetoasis.com/blog/a-firms-value[/quote]
Interesting article. Thanks for the link. So would you make a distinction between Firm's Value and Enterprise value? I see that you used the word Common Equity to make a distinction from equity value. And the formula you provided to find common equity is the same as what the Mckinsey book says in essence, except instead of calling it common equity, this book calls it equity value. Why would there be a disagreement? Simply because Mckinsey guys want to set themselves apart or something?
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