# Two questions in Equity

1. Example 19 (Reading 41, pg 427, Equity) Given Vfirm = 17401 Capital structure = 20% Debt : 80% Equity Long term debt - 1518 => Vequity? Book’s solution: Vequity = Vfirm - Long term debt = 17401 - 1518=15883 Question: Why not use the Capital structure here (ie: Vequity = Vfirm* 80% = 13,920.8)? Long term debt is just a part of debt, there might be short term debt, ect 2. Example 36 (Reading 42, pg 538, Equity) Enterprise value = Equity + Debt + Minority Interest - Cash Why + Minority Interest and - Cash?
1. minority interest is part of equity and cash is reduced bc you would use it to pay down debt once someone took control then they can change the cap structure

for the 1st question -> VFirm - Market Value of Debt = Value of Equity. Your Long Term Debt portion is currently valued at 1518 Billion - this might not be 20% of the firm’s capital structure. It might be more or it might be less. You cannot make a determination by multiplying the value of firm * capital structure provided.

Cpk123: Kindly clarify and confirm that the long term debt that is being talked of in the capital structure weights is actually based on PAR value of debt Whereas market value of debt is the debt directly used to get the value of equity

what is on the balance sheet of the company is the historical value - not market value. .

Enterprise value = value of the business. Best way for me to think of it, personally… You’re buying a house for \$1,000,000. You get the contents of the house with your purchase. In the living room is a briefcase with \$100,000. What’s the value of the building to you if you buy it at a million bucks? Vproperty = Vbuilding + Vbriefcase You’re essentially paying \$900,000 for the house. With enterprise value, we just want to know what we’re paying for the “building” part of the business - not the briefcase in the living room. I’ve sacrificed some of the finer points with my metaphor, but hopefully gained a lot of clarity. For me, this explanation is easy to remember and makes the concept stick.

Supersadface, your way of conceptualized the enterprise is interesting. Still, if thinking in that way, it can only explain the - Cash part, but not the Minority Interest, right? Any further comment?

diediemustpass Wrote: ------------------------------------------------------- > Supersadface, your way of conceptualized the > enterprise is interesting. Still, if thinking in > that way, it can only explain the - Cash part, but > not the Minority Interest, right? Any further > comment? Assume you purchased the home with another investor, and they contributed 20% to the deal. So they’re entitled to 20% of the cash and the home, or \$900,000*.2 = \$180,000.

bpdulog Wrote: ------------------------------------------------------- > diediemustpass Wrote: > -------------------------------------------------- > ----- > > Supersadface, your way of conceptualized the > > enterprise is interesting. Still, if thinking > in > > that way, it can only explain the - Cash part, > but > > not the Minority Interest, right? Any further > > comment? > > Assume you purchased the home with another > investor, and they contributed 20% to the deal. > So they’re entitled to 20% of the cash and the > home, or \$900,000*.2 = \$180,000. BP SAVES THE DAY. Yeah, that’s as good a way as any to think about it. Let’s go with that. Again, at the end of the day, this is a metaphor, not an exact replica of the formula. As others have said, come exam day, you want to know the formulae - but hopefully this helps you kind of grasp the bigger picture of what we’re measuring and why the formula reads as it does.

Bravo! It’s much easier to learn in this way. Thanks all.