1. Enterprise Valuation
If you haven't done so yet, please download the Excel file named Business
Valuation Exercises Template. This file contains several exercises we'll
walk through during this course. Let's take a quick look.
You can see on our cover page we have a table of contents
and each one of those topics is a link to a specific worksheet
in this file. Now, let's go to the EV and Equity Value tab. You
can use the shortcut Ctrl+Page Down to move one tab to the right.
Of course, Ctrl+Page Up will take you to the left.
Alternatively, we can click hyper link, just the first one, and you can
see we're now on the EV and Equity Value tab.
So let's work through this EV and Equity Value example together.
First of all, let's zoom in. Shortcut, you can do Ctrl+Alt+"+" to zoom
in. And we have two different scenarios here.
First, we can calculate enterprise value for a publicly traded company.
How do we know if the company on the left is publicly traded?
Well, we have a share price. So since we have a share price
and we can easily pull up the shares outstanding,
just multiply the two together and we get the company's market cap,
or market capitalization, of $500,000. It's really 500 million but we'll
just say 500,000. Then we can go and calculate net debt,
of course that includes both short term debt and long term debt,
and we'll subtract cash. Again, net debt is debt minus cash.
We'll take our short term debt plus our long term debt minus cash.
And now that we have market cap and net debt, we can calculate
enterprise value. So market cap plus our net debt,
and we arrive at an enterprise value of $527,605. Now, let's think about
enterprise value in another way. Let's say we went and performed a valuation,
either a discounted cash flow valuation or a relative valuation,
and we derived enterprise value of $527,605. Of course, we kept the numbers
the same, just for comparability. But our valuation, again, tells us the
enterprise value is $527,605. Well, we want to see, What does that imply
for this company's share price? Well, first we calculate net debt. The calculation
is the same as before. Add up both debt items, subtract cash.
Now, to get the market cap, in this case you get the enterprise
value minus our net debt, and we have a market cap, again, of $500,000.
And to figure out what that implies for share price, just our market
cap divided by our shares outstanding and we arrive at a $25
per share share price. So the point here is two fold.
On the left hand side, we can calculate enterprise value for a publicly
traded company. We can calculate its market cap since we have a share
price. We can calculate net debt and then we can calculate enterprise value.
On the right hand side, though, if we perform a valuation and derive
an enterprise value, we can then back solve for the implied share price.
One final point to make here, let's see what happens if the company
has more cash than debt. So we'll just hard code in a large
cash balance of $50,000, and you'll notice that net debt is actually negative
now. So if there's negative net debt, that means the company is net
cash positive. In this case, the company's net cash positive by $20,000.
But look what happens between enterprise value and market cap.
In this case, enterprise value is actually less than market cap.
So just one thing to note, again, when a company has more cash
than debt, enterprise value will be lower than market cap.
2. Let's practice!