I just finished level 1 and will be interviewing for ibanking next week. I dont know if they cover this in level 2, but does anyone know why you must add debt to market capitalization when calculating enterprise value? if a company has a market cap of $100M, and $20M of debt, ignoring cash, why would the enterprise value be $120M? why wouldnt you subtract the debt? wouldnt you naturally subtract debt from equity to calculate net worth?
EV represents the total market based capitalization of the company. Said another way, it includes the market value of all capital used to finance the business (ie the market value of the enterprise). This is why debt is included.
my god stop this shennanigan, I’m not ready to see this again just yet…too soon
I usually think of EV as a valuation for 100% of the company’s assets, i.e: Market cap - value of shares/equity + debt - banks have claims on the company’s assets, so you need to buy them out - cash - this just reduces your effective purchase price + minorities - again, minorities have claims on the income generated by your company, so you will need to buy them out to keep 100% These are the major positions - sometimes other things would also be added on (eg. unfunded pension liabilities). A special case would exist where the company is close to bankruptcy or has major liquidity problems - in that case I would also add in up to 100% of the negative working capital (assuming it is negative), since that amount of money would also be have to be paid to the creditors in order to take control of the company and keep it out of bankruptcy (where debt holders claims would be prioritized over equity holders).
Couldn’t agree more BlackSwan… I want to kick these guys in the nuts.
EV = MCap + Debt + MI + Preferreds - Cash Make sure you know this as Ibankers calculate EVs everyday.
It’s also easy to just think of it as the basic accounting equation. Assets = Liabilities + Equity EV = Debt + Equity