Enterprise Value Lecture Notes

Enterprise Value Lecture Notes - Enterprise Value Lecture...

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Enterprise Value Lecture Notes A. A sample of some Valuation methodologies that we have studied. 1. NPV 2. IRR 3. CAPM 4. Dividend Growth Model B. What is the most widely used methodology by financial experts? 1. Enterprise Value (“EV”). a. What would it cost to buy the entire company? i. Question: COMPANY A and COMPANY B have the same exact market capitalization. Would it cost the same to buy both companies? ii. To buy a company you have to buy all the stock. iii. But you also may have to assume debt. iv. QUESTION: COMPANY A and COMPANY B: Both have the same market capitalization but COMPANY B has $10.0 million of debt? Which costs more? v. But you also get to keep the cash. vi. QUESTION: Same information as above but COMPANY A has $20.0 million of debt. Which is more expensive? vii. Note: Cash reduces your effective purchase price. viii. Ex. If you buy a car where you pay the seller some cash and assume someone’s car payments (debt) but also get to keep the cash that’s in the glove compartment. 1. Ex. You buy a friends car and assume the car loan. 2. Calculation. a. Assume you pay $3,000 cash. b. You assume her remaining loan of $5,000. c. But you find $1,000 cash in the trunk. d. EV = $3,000 + $5,000 - $1,000 = $7,000. e. This is the real cost (purchase price) of the car! ix. The real cost of buying a company is the cost of the equity, the debt that you assume (if any) less the cash that you get to keep (if any). b. What is the company’s equity really worth compared to what it is trading for? Is the market valuing the company correctly? How is it valued versus comparable companies? c. What is the equity worth? d. Knowing EV is good but knowing EV relative to EBITDA is better. 2. What is the “enterprise”? Keane 1 Enterprise Value Notes
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a. The value of the company. i. The company’s operations. ii. NOT the company’s non-operating assets! iii. NOT the value of the company’s assets at market value. 1. Highest and best use issues for real estate. 2. Ex. Opportunity exists for other value to be created by relocating manufacturing operations.
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