Enterprise value and equity value
By the end of this lecture you will be able to
- Count diluted shares tranche by tranche, including restricted stock units and convertibles
- Build the full bridge from equity value to enterprise value and justify every line
- Pair each multiple with the right measure of value and keep both sides consistent
- Predict how transactions move enterprise value, equity value and multiples
“What is this company worth?” has two correct answers, depending on who is asking. A lender, a shareholder and a buyer of the whole business each look at a different number. Today we separate the value of the operating business from the value that belongs to shareholders, go through every item that sits between them, and meet the company we will value from end to end in this part of the course. Almost every valuation question in an interview passes through this bridge.
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Interview questions on this lecture
What is the difference between enterprise value and equity value?
Equity value is the value of the shareholders’ claim: diluted shares times share price. Enterprise value is the value of the operating business to all capital providers. EV equals equity value plus debt, preferred stock and noncontrolling interest, minus cash and non-operating assets.
Why do you subtract cash when calculating enterprise value?
Because cash is not needed to run the operating business and does not generate operating earnings; a buyer of the whole company effectively gets it back. It is subtracted for consistency with operating metrics like EBITDA, not because it is a liability.