Equity Value and Enterprise Value Interview Questions: What to Expect [REVISED]

In this tutorial, you’ll learn what to expect in interviews when it comes to Equity Value and Enterprise Value, and you’ll understand the key principles you can use to answer any question on these topics.
Resources:
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youtube-breakingintowallstree...
Table of Contents:
0:00 Introduction
1:05 Corrected Rule for Eq Val
3:39 Interview Question Overview
5:04 Basic Definitions
6:23 Calculations
7:39 Pairing Metrics to Create Multiples
10:35 How Events Impact Eq Val and TEV
13:43 Real-Life Events
15:10 Recap and Summary
Lesson Outline:
Questions about Equity Value and Enterprise Value include their basic definitions and meaning, calculations for both based on sample share counts, share prices, and Balance Sheets, and explanations of how to pair certain financial metrics with one or the other.
They may also ask you about why Equity Value or Enterprise Value change after specific company events, and how much they change by, as well as how “real-life” events impact both metrics.
The most important points and principles for answering these questions are as follows:
Equity Value: The value of EVERYTHING a company has (Net Assets, i.e., Total Assets - Total Liabilities), but only to EQUITY INVESTORS (i.e., common shareholders)
Enterprise Value: The value of the company’s CORE BUSINESS OPERATIONS (Net Operational Assets, i.e., Operational Assets - Operational Liabilities), but to ALL INVESTORS (Equity, Debt, Preferred, and possibly others)
The significance of these is that Equity Value changes when the company’s capital structure changes, but Enterprise Value does not - at least, not in theory, which makes it useful for analyzing and valuing companies.
Equity Value Calculation: Diluted Shares * Current Share Price
To calculate diluted shares, take the basic shares from the company’s filings and add dilution from options, warrants, RSUs, convertible bonds, and other dilutive securities.
Use the Treasury Stock Method (TSM) for options and assume the employees exercise their options, the company gets the proceeds, and then it uses the proceeds to repurchase some of the shares.
Enterprise Value Calculation: Equity Value - Non-Operating Assets + Liability & Equity Items that Represent Other Investors
The most common Non-Operating Assets are Cash, Investments, and Associate Companies or Equity Investments. The most common L&E line items here are Debt, Preferred Stock, and Noncontrolling Interests.
Think of Valuation Multiples as “per square foot” or “per square meter” values for houses - let you normalize for companies’ sizes.
If the metric deducts Net Interest Expense (and Preferred Dividends, if applicable), pair it with Eq Val; otherwise, use TEV in the valuation multiple.
Does Common Shareholders’ Equity change? If so, then Equity Value changes; if not, Eq Val does not change.
Do the Net Operating Assets change? If so, then TEV changes. If not, then TEV does not change.

[@pandafox12]

Perfect video to refresh my memory before an interview

[@financialmodeling]

Thanks for watching!

[@jhchecri]

I swear this channel is a national treasure

[@financialmodeling]

Thanks for watching!

[@alyelhalwany3369]

I appreciate and respect your enthusiasm and way of explanation, I really would like also to thank you!!

[@financialmodeling]

Thanks for watching!

[@nhdhruva]

Great vid! I just had a question for clarification purposes. In regards to the question where "A company issues $100 of stock and $100 of debt to purchase $100 of PP&E and $100 of Investments," the reason Equity Value is going up is because of the $100 worth of stock being issued, and Enterprise Value also goes up because PP&E (An operating asset), went up so that means Enterprise Value also changes and gets higher.

[@financialmodeling]

Yes, that's correct.

[@SpizzieBeats]

Mergers & Inquisitions / Breaking Into Wall Street wouldn’t the TEV change be due to debt +100? Am I missing something in EV + net debt?

[@financialmodeling]

@@SpizzieBeats That's not the best way to think about it because Enterprise Value does not depend on the company's capital structure. These questions will be 10x easier if you think about whether or not Net Operating Assets changes to determine the change in Enterprise Value.

[@sonerguney3225]

Very good. Well done

[@financialmodeling]

Thanks for watching!

[@fitnnut9015]

in question 4 where you increased $ 100 of Stock and $ 100 of Debt to purchase $ 100 of PPE and $100 of Investment but the change in Enterprise value is $ 100 dollar because of the increase in PP&E but while calculating Enterprise value we also add the total debt and change in operating assets and deduct cash and cash equivalents, so if we go by that equation to calculate the change in enterprise value then it would be like this: Equity - increases by $100 Debt - increases by $100 Cash and Cash Equivalent - stays the same as cash is used to buy assets PP&E - increased by $100 Investment - increased by $100 so the Change in Equity value would be = $100(increase in equity)+$200(increase in cash)-$100(investments & pp&E) = $ 100. And Enterprise value = $100 (Equity value) - $ 100 (increase in operating Expense) + $100 (increase in Debt) = $100 Please correct me if i am wrong

[@financialmodeling]

You could do it that way, but it's longer and more complicated, which means there's more room for error in an interview. Also, your walkthrough is not quite correct because if you want to view it like that, you should calculate the change in *Net Assets* for Equity Value. They increase by $200 - $100, since the PP&E + Investments go up by $200 and the Debt on the L&E side goes up by $100, making it a $100 increase in Net Assets. And with the Enterprise Value formula, Equity Value is up by $100, but Cash/Investments are up by $100, and Debt is up by $100, so these changes cancel out and Enterprise Value is simply up by $100.

[@Sidbaazi1863]

That was excellent @Mergers & Inquisition. Can you please post one video on Quantitative Analyst Interview Questions like that one.....??

[@financialmodeling]

Thanks. It's not really our area of expertise since we focus more on fundamental analysis, but we may add some quant-related articles this year.

[@rafikhovsepyan3713]

Looking forward to that too...

[@guillaumegourgaud8968]

I thank you for this video, really great! In the excel file an increase in accounts receivables leads to an increase in turnover. However, why does a decrease in accounts receivable not have an impact on turnover? Shouldn't it decrease?

[@financialmodeling]

No. A decrease in AR means the company has collected cash that customers owed and that has already been recorded as revenue.

[@georgiosaxarlis1396]

Great Video man thank you! Where can I get this excel sheet that you are using?

[@financialmodeling]

Click Show More and open the Resource links.

[@olganasledysheva8482]

Thanks for the video! I have a question: in the portion where we add 100 of stock, 100 of debt, 100 of PPE, and 100 of Financial Investments. Equity up by 100 , Debt up by 100, Cash up by 100, then Cash down by 100 to purchase PPE, PPE up by 100 - here we get an increase in EV of 100 due to PPE and increase in EqV, that's understandable . But the part about financial investments I don't really understand: usually we subtract all non-operating items like financial investments, equity investments etc. Why in this case the increase in financial investments doesn't lead to a corresponding decrease in the EV?

[@financialmodeling]

It's easier to think about this one in steps: In Step 1, the company issues $100 of Stock, boosting CSE by $100, so Equity Value goes up, and it issues $100 of Debt, which does nothing yet since it leaves the proceeds in Cash for now. In total, the company now has $200 in Cash proceeds from these transactions. Now, the company takes this Cash and purchases $100 of PP&E, which boosts its Net Operating Assets by $100. Therefore, Enterprise Value increases by $100 since it has "transferred" non-operating assets to operating assets. And then it takes the remaining $100 in Cash and purchases $100 in Financial Investments. These are both non-operating assets, so nothing changes. In other words, before the purchase of these financial investments, we would have subtracted the remaining $100 in Cash in the Enterprise Value calculation... and after the purchase, we still subtract $100, but now it's in the form of the financial investments, not the cash. If the company uses Cash to change its Net Operating Assets, that will affect Enterprise Value - but if the Cash goes into some other asset, such as equity investments or financial investments, nothing happens since Net Operating Assets do not change.

[@jaromejordan7943]

Are there courses on these that will help me better understand excel and IB modeling more comfortably?

[@financialmodeling]

Please see: breakingintowallstreet.com/biws/breaking-into-wall-street-courses/

[@cozybreezes8374]

When calculating Enterprise Value for a Listed Company - we can always have latest equity value easily BUT how do we access the market value of its debt? Listed companies only reveal debt information in their periodic earnings... For example, I want to calculate Enterprise Value of Unilever as of today, but I only have its FY19 annual report and latest share price info, how should I value the debt as of today?

[@financialmodeling]

Look up the fair market value or fair value of its debt in its annual report and use that. The market value and book value and face value of debt rarely differ that much for large, healthy companies. So it's not the end of the world if they don't list it and you have to get it from the Balance Sheet instead.

[@jordimrc4499]

Thanks for the video! I have a question regarding the impact of a PPE investment on EV. I understand that EV increases because PPE is a core asset, but from the point of view of a DCF (and assuming the NPV of that PPE investment is 0 - no arbitrage), why would EV increase? Under that assumption, the discounted free cash flows from that PPE will equal the initial investment (Capex) and the EV would stay the same, right?

[@financialmodeling]

Because a PP&E investment should, in theory, increase a company's future cash flows if it is an actual productive investment. The additional discounted free cash flow from the PP&E should be higher than the PP&E value itself or there's no point in making the investment.

[@jordimrc4499]

​@@financialmodeling ​ Thanks, makes sense. And if a PP&E investment of 100 increases EV by 100, the implication would be that the NPV (deducting initial 100 of Capex and adding subsequent discounted cash flows) of such investment is also 100?

[@financialmodeling]

@@jordimrc4499 Not necessarily because Current Enterprise Value (based on current market values) and Implied Enterprise Value (based on expected future cash flows) are different. Both should increase, but if you have very different views than the market, it won't be the same increase.

[@barunrai7906]

@@financialmodeling if that's the case then will the auditor (while testing impairment of the asset) not come up with a higher valuation that matches the NPV of future cashflows?

[@financialmodeling]

@@barunrai7906 An auditor could always come up with a different valuation for the asset. This is why asset values are adjusted when a change of control happens. But in practice, PP&E is rarely written up in day-to-day activities (and asset write-ups outside of deals aren't even allowed under some accounting systems). We're trying to focus on the core concepts that are likely to come up in interviews here, not edge cases that auditors like to debate.

[@waqarali-dt9qq]

Nice dear can you elaborate about market multiple

[@financialmodeling]

??? Not sure what you mean.

[@Rhea1]

Great video!! Can we get access to the excel sheet you're using in this video?

[@financialmodeling]

Click "Show More" and scroll down to the files.

[@Rhea1]

@@financialmodeling No idea what's wrong but I cant really see any files attached :/

[@romancandlefight1144]

12:40 Debt is non operating [so its change is ignored calculating Enterprise Value] It must be a dumb question.. but if debt is +100 then wouldn't you be adding that higher debt amount to get the final Enterprise Value, if approaching it from the perspective of the bridge between Equity Value and Enterprise Value (where debt is added)?

[@financialmodeling]

When Debt goes up by $100, Cash also increases by $100 (until the company spends the Cash on something). Therefore, both changes offset each other in the bridge, and one part is up by $100 and one is $100 more negative, so there is no change in Enterprise Value.

[@gaurav2019]

Hi, in Q1, you said, eq value changes when cap structure changes and eq value is nothing but net assets. If suppose a company borrows $100 of debt, it would then as a result would receive $100 of cash. So the change in net assets would be $0 and therefore, eq value will not change though there's a change in cap structure. Isn't it right?

[@financialmodeling]

If a company issues $100 of Debt and keeps the proceeds in Cash, yes, Equity Value stays the same. However, the statement made here was not "Equity Value changes when the capital structure changes." The statement here is: "If the company's capital structure changes, Equity Value MAY CHANGE but Enterprise Value SHOULD NOT CHANGE." In real life, a more accurate version of that statement is: "If the company's capital structure changes, Equity Value is likely to change by MORE and Enterprise Value is likely to change by LESS or not much at all." So... with some capital structure changes, Equity Value changes, and with others, it does not. If a company issues Debt to repurchase Stock, Equity Value changes because the Net Assets change, and common shareholders are responsible. But if a company issues Debt to buy PP&E, Equity Value does not change because Net Assets stay the same. Both sides of the Balance Sheet are up by the same amount, so even though the capital structure changes, Equity Value does not.

[@gaurav2019]

@@financialmodeling Got it, thanks.

[@dylanrocksify]

If equity value is in the formula to calculate enterprise value, how can equity value change and enterprise value not change?

[@financialmodeling]

A company generates $100 in Net Income and lets it sit in Cash on its Balance Sheet. Equity Value goes up because Common Shareholders' Equity goes up by $100, but Enterprise Value does not change because Net Operating Assets have not changed. Also, in the formula, the higher Equity Value is offset by the subtraction of a higher Cash balance.

[@eugene7678]

@@financialmodeling Hi! 1. you didn't bring up the question of the change in EV/Equity if the company issues dividends for NCI and in general how can they be interpreted here ? So for example if we have net income that extends to NCI, how would EV/Equity change ? Or for example the company pays dividends to NCI ? Can you please explain this point? And the second point, the same thing with preferred investors Do I understand correctly that Equity value will increase if we pay a dividend to NCI? The EV will remain the same since we are not touching the core business and overall EV is neutral to structure changes? Please explain in terms of accountability and logic Let's make a real case, for example if there are two companies, one owns the other 70%, the company (which is 70% subsidiary) issues dividends, 70% of them will be intragroup turnover and the other 30% not, and if we add the two EVs and subtract the reduced NCI (by the amount of dividends and debt for example we get EqV which has increased, right?

[@Abbas-oj6ne]

5:00

[@lavishsingla4431]

Can Enterprise Value be less than Equity Value?

[@financialmodeling]

Yes. It can even be negative! kzbin.info/www/bejne/fqnEp4edibVjbZI