Value of Equity using EV/EBITDA Multiple

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2004028's picture

Hi all,

If anyone did sample test 2011 then you should have saw this question already.
V1 Q22.

Asking to calculate Value of Equity using EV/EBITDA Multiple.

After getting EV, the answer added Cash & ST Investment and minus LT Debt only to get Value Equity.

My question is I though that to get Value of Equity from EV, we can simply subtract Value of Debt. Why do we need to added Cash & ST Inve? And why do we only minus the LT Debt?

Thanks for helping in advance.

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PuneCFA's picture

Hey actually Enterprise value (EV) is total market value of equity and debt after talking out Cash and Short term investment from it. Also it only include long term debt market value and not current debt.

So to calculate value of equity from EV, we need to add back cash deduction which we already did and then reduce maket value of LT debt from it.

Hope I answered your query. Revert me if you still have some doubt.

Thanks

2004028's picture

Thanks PuneCFA,

I always thought that EV value already eliminated Cash and add LT debt in. So to do it one more time for getting value of equity is confusing……

But, I guess you are right.

turbo989's picture

Just a quick bump.. 

Enterprise Value is basically the net value  to a buyer. You subtract cash (since all cash is used to pay down any debt).

S2000 has said if you buy a wallet for $100 bucks but there are $20 dollars in the wallet, you really only paid $80.

Why then is cash added back to figure out Equity? I thought cash was removed so there was no double counting. Just trying to figure out why we add it back in from a high level overview…

olajideanuoluwa001's picture

Cash is added back because it is also part of the asset you inherit after buying the asset.

EV assumes that the cash and marketable securities can be sold and used to reduce the debt inherited when the company is purchased. So to actually vaue the equity, then the cash needs to be added back to equity.

Cheers.

turbo989's picture

Great summary thanks

Harrogath's picture

Long-term debt less cash and marketeable securities is called Net Debt. So EV is market value of equity plus market value of net debt.

Why net debt? As many fellows told above, you can use that money to pay part of the debt today.

MrSmart's picture

The concept and definition of EV is very mixed and differs from one author to another.

In general, to derive the market value of equity from an EV/EBITDA multiple, you need to subtract the fair value (for exam purposes, it is synonym with market value) of all debt, minority interest, and PS from EV, then add back the market value of all non-operating assets, including excess cash, not all cash.

The reason we do that has nothing to do with net debt or an assumption that we pay off part of the debt as commonly thought, but because it is not included in our EBITDA breakdown, so we price it in seperately.

Good luck.

Corrcet me if I'm worng

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