Equity Value vs. Enterprise Value and Valuation Multiples

Learn more: breakingintowallstreet.com/co...
Learn how Equity Value and Enterprise Value change when a company issues debt, pays off debt, issues equity, and repurchases shares.
By breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers"
The key point is that regardless of how a company is financed, its Enterprise Value - and Enterprise Value-based multiples - do NOT change. Equity Value, however, may change depending on its share count and any shares it issues or repurchases.
So even when a company changes its debt or equity or cash levels, valuation multiples such as EV / EBITDA and EV / Revenue will not change immediately afterward... whereas a multiple such as P / E (Price Per Share / Earnings Per Share, or Equity Value / Net Income) will change if new equity has been issued.
It's just like when you buy a house - house is worth $500K regardless of whether you pay with 100% cash or 50% cash and 50% debt, or anything else in between... but depending on how much cash and debt you use, your own EQUITY IN THAT HOUSE will be different.
The $500K total value of the house is like the Enterprise Value for a company.
And if you contribute $250K of your own cash and take on a $250K mortgage, the $250K you chip in is your "Equity Value" and the $250K mortgage is the "Debt."
Over time, your own "Equity Value" in that house will increase and your own "Debt" will decrease as you repay the mortgage, but the $500K total value for the house stays the same as long as the house's intrinsic value remains the same.
This example uses Coca-Cola's filings and financial statements - you can find them and try this yourself right here:
www.coca-colacompany.com/inves...
www.coca-colacompany.com/inves...
(NOTE: The numbers, of course, will be different if you look at this video at a later date, but the concept remains the same and has always been the same ever since Equity Value and Enterprise Value were invented.)
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[@aminchabbi]

Very well crafted, as usual. As concise as it gets, yet delivering full value. Thanks Brian.

[@financialmodeling]

Thanks for watching!

[@keithe698]

You're doing a fine job of explaining these concepts. Keep it up and thank you.

[@financialmodeling]

Thanks for watching!

[@COryThoma5]

Thanks so much - very well and efficiently explained. Take care!

[@financialmodeling]

Thanks for watching!

[@nickhadi1396]

Hey man! Your video helped me a lot!! Thx for doing this. Keep up the great work.

[@financialmodeling]

Thanks for watching!

[@andrewhutsell8504]

Great concise video. Perfectly explained

[@financialmodeling]

Thanks for watching!

[@LoLik618]

Great videos and templates, well done!

[@financialmodeling]

Thanks for watching!

[@LoveAndPeaceAround]

Very well explained..!! Great job..thank you..!!

[@financialmodeling]

Thanks for watching!

[@yanwenwei5462]

Thanks! Much eaiser to understand than simply reading by myself

[@financialmodeling]

Thanks for watching!

[@user-vz7nf5fb6d]

Hi, Brian I understand that there are simplifications in the video but could you please comment on whether the equity (market cap) will change because of raising additional equity (through spo, for instance) ? I guess that market cap shouldn’t change, because more shares will be offset by lower share price (because of dilution). Thanks in advance!

[@financialmodeling]

Yes, the Equity Value or Market Cap will increase if the company issues additional equity. Maybe not a 1:1 increase in real life, but there will still be some increase. Issuing more shares does not mean the share price will fall proportionately. If that were true, then the concept of Enterprise Value would be invalid (since financing events would affect it). See the latest video in this channel.

[@narci0212]

Like before watching 😁

[@financialmodeling]

Thanks for watching!

[@edpan5334]

very helpful. could you advise me how you come up with the number for Unfunded Pensions in the spreadsheet? I cannot locate the figures in the 10-Q. Thank you!

[@financialmodeling]

Do a search for "pensions" or "post-retirement obligations" and they should list the funded vs. unfunded portions.

[@junigina0215]

Thank you for these videos which are very helpful. I'm just confused about the definifion of these terms "Enterprise Value" and "Equity Value". According to your video titled "Why Do You Use Net Income to Calculate Return on Assets (ROA)", Enterprise value is the value of only core business assets. Then why do you include (add) debt to Equity value to reach at enterprise value?

[@financialmodeling]

Your definition is incomplete. Enterprise Value is the value of ONLY core business assets but to ALL investors in the company. That is why you add Debt - to reflect ALL investors in the company.

[@marcwollheim6908]

Hi Brian, quick question: What is generally higher - LTM multiples or NTM multiples? I thought NTM because you might include growth prospects in it? Thanks!

[@financialmodeling]

LTM is higher for growing companies because the denominator is lower... if Revenue is $100 last year and $120 next year, but the numerator stays the same, then clearly the trailing multiple will be higher.

[@bladeknight777]

Could you put up the excel file in the description?

[@financialmodeling]

Yup, just linked to the Excel file on the 2nd line of the description.

[@minakh4814]

What is the difference between book value and market value in Equity Value?

[@financialmodeling]

Book Value is Common Shareholders' Equity on the Balance Sheet. Market Value of Equity is the company's market cap or Share Price * Shares Outstanding, which is usually much higher because the market value of most companies' Assets - Liabilities far exceeds the historical numbers shown on the Balance Sheet.

[@aamir6666]

Hi While I'v been looking in to some of your videos and find them quite insightful about Investment Banking n MnA, this video seems quite confusing even if its from answering interview questions perspective. By your own admission, just because a company has issued more shares, the Enterprise shouldn't change, the same logic would be applied to equity value. Generally issuing more shares would not effect the equity (market) value of the company, because the share price would adjust to reflect the increase in shares outstanding. Therefore, there is more likelihood of Enterprise Value changing due to increase in cash than equity value. Appreciate your response..

[@financialmodeling]

No. Issuing more shares increases the company's Equity Value because the company receives extra Cash from issuing those shares. Cash counts toward the company's Total Assets. Equity Value represents the value of All Assets, but only to equity investors. Since equity investors were responsible for this change that increased the company's *Total Assets*, Equity Value increases. The share price does not just "adjust" when new shares are issued. It must reflect that the company's Total Assets have increased.

[@amgprofessionals5076]

I have a little observation. When you repurchase shares, you could also do this by raising debt. Tax shield on the debt will increase the Enterprise value. Net income will change with the increased interest payment from leverage finance as as P/E multiples. I didn't see that happened or did just miss something?

[@financialmodeling]

No, the tax shield on the Debt will not substantially change the Current or Implied Enterprise Value because the Implied Enterprise Value is based on the company's value in an Unlevered DCF, and you explicitly ignore the tax shield there because the Unlevered DCF is supposed to be capital structure-neutral. And the Current Enterprise Value won't change because of the reasons shown here. In real life, there will be some moderate change when the capital structure changes because the Discount Rate will change, which is why no change is truly "capital structure-neutral." But the idea with Enterprise Value is that certain changes cause *less* of a change than others.

[@michaelibe1392]

@@financialmodeling Unlevered DCF output is based on the discount rate applied. If the discount rate applied assumes a higher Debt to Equity ratio, this will affect the implied Enterprise value from a DCF standpoint. I believe a discount rate is applied to Unlevered DCF as well. Sorry. It is a little bit confusing. Kindly explain

[@financialmodeling]

@@michaelibe1392 Yes, already answered above... "In real life, there will be some moderate change when the capital structure changes because the Discount Rate will change, which is why no change is truly 'capital structure-neutral.'"

[@rk5532su]

Hi, are there scenarios in real life in which one would rather look at/ use Equity Multipels rather than EV Multiples for valuation? Thanks

[@financialmodeling]

For most industries, no. The main exceptions are commercial banks and insurance firms because there, the concept of "Enterprise Value" is not applicable, so you do look at multiples like P / E, P / BV, P / TBV, etc. You'll occasionally also see Equity Value-based multiples in industries like REITs and oil & gas pipelines for related reasons (corporate structure and/or capital structure).

[@2kneverstops]

In your calculation of TTM P/E why did you divide equity value by net income? Why not do: share price/(net income/shares outstanding)

[@financialmodeling]

Because it's the same thing (think about the math... Equity Value = Share Price * Shares Outstanding)

[@2kneverstops]

That makes sense, but just from a consistency perspective, is one or the other more commonly used?

[@MM-yq2mc]

Good Video,. However, in scenario 1 - how does your PE value go from 19 to 21, even though your equity value is going up? I thought that you had made an assumption in the beginning that the price of the share is unaffected for the purpose of this video; meaning that the price stays the same and with a higher equity value as a result of the equity issuance - the PE value should come down and not go up.

[@financialmodeling]

The share price is unaffected, but the share count is affected. P / E = Equity Value / Net Income, and more shares at the same share price means a higher Equity Value. Net Income doesn't change, so the P / E multiple must increase.

[@ac123cut]

Hi Brian, Doesn't the risk of the business (WACC) change in relation to the capital structure? Therefore affecting the valuation of a company? Im guessing this is just an explanation for the actual market EV and EqV, and not the implied values. Thanks, Alex

[@financialmodeling]

Yes, but as you said, this is just how to think about the current market value Equity Value and Enterprise Value, not the implied values as calculated from a valuation or DCF.

[@ac123cut]

Do I Bankers care more about the implied value, rather than what the market perceives it as? In other words, if a company changes it's capital structure, the I Banker would fix his valuation model, rather than doing this little exercise in his head? Thanks

[@financialmodeling]

Alex Cutulenco It depends on what you're using it for... you will almost always calculate both for any company you are valuing because you need to know the components of Enterprise Value to determine the company's Implied Equity Value or Implied Share Price. To your question, yes, of course in real life you would adjust the actual model for the new capital structure. This video was intended to answer common interview questions on this topic.

[@amgprofessionals5076]

Well, if you assume M&M theorem holds, the WACC will not change. You'll adjust the cash flow for the perceived risk.

[@gabong221091]

I have a question, it make me confuse. For the fund raising in startup company, Company A raise 3mil for 10% of shares at post money valuation. It's mean that after receiving 3mil, the Company valuation will be 30mill. Is the company valuation before this fund raising round is 27mil? Does this match with your lesson that the EV will be not change when issue the new shares?

[@financialmodeling]

Yes. If the VC owns 10% post-money and the company raises $3 million, the pre-money valuation was $27 million and the post-money valuation was $30 million. These numbers refer to Equity Value, not Enterprise Value. The Enterprise Value does not change immediately after a capital raise.

[@mohamednazir3854]

can i have he excel file for my own study

[@financialmodeling]

Please look in the second line of the video description.

[@learnandgrow6584]

super ..

[@financialmodeling]

jatinder singh Thanks for watching!

[@thenbamatrix]

What happens when a company raised money to invest in the company but it hasn’t used it yet but plans to use it. What happens to EV?

[@financialmodeling]

If the money just goes to the company's Cash balance and sits there, Enterprise Value will not change. If the company then announces firm plans to use the funds, such as for an acquisition or expansion project, then Enterprise Value should increase the funds are about to leave Cash and move into core-business Assets such as PP&E, Inventory, etc. Of course that may not happen immediately in real life because it depends on how specific the plans are, how much the market believes in the company, etc.

[@joejohnson6927]

Hello! Quick thank you again for all the videos so far. By far the best content out there. I was wondering if you could explain this to me: I understand what items get added and subtracted once we have defined Enterprise Value and Equity value. However, I don't understand why they are defined the way they are and what the implications are in the broader context. Equity value is the value of all the assets of a business but only to common shareholders and Enterprise value is the value of core assets to all investors. But why? Why is equity value not core business assets to common shareholders, and conversely, why is enterprise value not represented by all assets to all shareholders? If we did calculate these wrong values - what would they represent (basically why are EV and EqV defined in the way that they are)? Also, in your PDF guide that I found on your website, I noticed that you took coach's balance sheet and highlighted their assets. You mentioned that they 'represent' Equity value. I get the market value and implied value but not too clear on how the actual assets represent the value. Sorry for the long winded questions! If you have time to answer any of them at all it would be very very very much appreciated :)

[@financialmodeling]

The assumption is that Equity Value comes from both internal and external sources - the company's own Net Income generates it because it flows into Equity, and it can also raise capital from outside investors in IPOs, follow-ons, VC rounds, etc. But Enterprise Value comes *mostly* from outside sources because a company can't "internally" generate Debt, Preferred Stock, etc. (and yes, Enterprise Value also includes Equity... but the percentage of outside funding sources in it is still higher). So the assumption is that mixed inside/outside funding (Equity value) can be used to fund anything - core and non-core business assets - while primarily outside funding (Enterprise Value) is probably not going to be used to fund non-core assets but rather assets related to the company's main business. There are obviously many reasons why this does not hold up in real life, why there are exceptions, etc., so keep in mind that this is not like a theorem in math or physics with provable equations and assumptions. It's at best a rule of thumb that gives a quick-but-not-always-perfect view of a company.

[@JohnDoe-ow4nl]

​@@financialmodeling @Joe Johnson Thanks to both of you; that's the question I've had for a long time now. The answer makes kind of sense, but tbh I was hoping for something more profound. But, as BIWS suggested, Banking/Finance/Economics is not hard science, there are no laws of nature

[@on.belief]

Hide your grid, yo.

[@financialmodeling]

This is a very old video that uses very different formatting/Excel standards... look at anything post-2014 or so.