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Enterprise Value Calculation Click to edit Master title style

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Enterprise Value Calculation Equity Value and Adjustments

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Equity value and adjustments Detailed analysis of the Equity Value includes some adjustments

Adjustments convertible bonds Adjustments for options in the money

Total Equity Value (including adjustments)

Equity Value of shares

Equity Value

Effect of exercised options using treasury method

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Effect of converted bonds

Total Equity Value, including adjustments 3


Equity value Basic Equity Value Calculation General calculation  For a listed company, the Equity Value is the market capitalization of the company: ― Equity Value = Stock class A * Share price class A + Stock class B * Share price class B +…

 If the price of the stock is very volatile (for none apparent reason), it is possible to take an average of the share price over 1, 3month… period

Market Value of Class B shares # of shares outstanding (NOSH) * share price Market value of the Equity Market Value of Class A shares # of shares outstanding (NOSH) * share price

NOSH A =100 Share price A = 10 Value A =1,000

NOSH B =50 Share price B = 5 Value B =250

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Total Equity Value = Value Class A shares + Class B shares Equity Value = 1,250

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Equity value adjustment - options Companies usually have Stock option plans for their employees, which need to be taken into account in the calculation of the Equity Value General overview and treasury method  Options: financial instruments usually used in employee incentive plans

― Awarded to an employee, it gives the right to an employee to

acquire a certain number of shares of the company at a normally favourable price (strike price) at a certain moment of time (once the options are “vested”)

 Equity Value must be adjusted for Options in the money  We commonly use the treasury method to assess the impact of options on the Equity Value:

Treasury method and Equity value adjustment  If options are in the money (exercisable and in the money), they are assumed to be exercised

 The company issues the respective amount of shares  With the proceed of the new issue, the company buys back

worth of the same amount of shares @ current market price

 From the example on the left side: 1.

The company granted options to its employees in T0

2.

In T1, the options are in the money, so the employees buy 100 new shares @ $8, which results in a $800 proceeds for the company, which issues 100 new shares

3.

With the proceeds ($800) the company decides to buy-back shares on the financial market, listed @ $10: the company buys back 80

Period: T0

Company

100 stock options Strike price: $8

Employee

Share price: $6 Exercisable in T1

 The result of this process is 20 new shares are trading on the markets at a current share price of $10

Period: T1

Company

Company

100 * $8 = $800 100 new shares $800 worth of shares @$10

Employee

Market

Adjustment for options 20 * $10 = $200

Share price: $10 Options are exercised

Share price: $10

Market value of the Equity $1,250

Equity Value $1,450

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Equity value adjustment - convertible bonds While convertible bonds are a debt instruments, they can converted into equity under specific circumstances General overview  A convertible bond is a usual bond assorted of a right to be

Equity value adjustment  A company has 10 bonds with a market value of $8 each

converted into equity

 Share price is at $10

― The company pays interest to the bond holders and repays

 The bonds are assorted with a conversion right to stock as

principal

follow: 1 bond = 1 right and 1 right = 1 share

 The clauses of conversion of a bond can differ from one case to another. The conversion right can be exercised:

 Before conversion:

― At a change of control (if the company is acquired)

Bonds $80

― If the share price of the company reaches a certain threshold ― Etc…

 What happen in the case where bond holders decide to convert

Total $1,530

Equity Value $1,450

their bonds? ― The company will issue new shares corresponding to the

conversion agreement

 After conversion:

― The exercised bonds are extinguished

Bonds $80

 If we assumed that the bonds are converted into shares, they can’t be considered as debt anymore!

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Equity Value $1,450

New equity $100 $100 new shares issued trading at $10

Total $1,550

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Enterprise Value Calculation Net Debt and Debt-liked Items

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Net debt and debt-like items Further adjustments are needed, regarding debt-liked items

Pensions Leases

Net Debt

Enterprise Value (excluding adjustments)

Total Equity Value (including adjustments)

Total Equity Value, including adjustments

Total financial debt - cash

Debt-liked item: operating leases

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Debt-liked item: unfunded pensions plans

Enterprise Value

8


Net debt After calculation of the Equity Value of a company, the net debt has to be added Net Debt  If the company has very little debt vs. cash it can have a “net cash” position

Long term debt

Net debt

Cash

Equity

EV pre adj.

Cash equivalent

Current portion of long term debt

Net debt Short term debt

Maturity date: within 1 year

Payment of long term debt happening within 1 year

Maturity date: beyond 1 year

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Cash in the bank

Very liquid financial instruments considered as cash 9


Debt-like item adjustment - leases Operating leases can be considered as debt items General overview

Adjustments for leases

General overview

Before adj.

Adjusted

Operating lease vs. financial lease

Lease expense

(20)

0

Operating lease: impact is an expense on the income statement

Implied EBITDA

200

220

Lease on balance sheet (debt like item)

0

200

Impact on Enterprise Value

0

+200

10,000

10,200

(rent) ― Operating lease will be considered as a “rent”, as an

operating cost and will be taken into account in the EBITDA

Financial or capital lease: is accounted as if the company purchased the asset through debt financing

Enterprise Value

― The asset appears on the Balance Sheet and is depreciated

(P&L) ― Interest on the loan appears in the P&L

Converting an operating lease to financial lease

As a rule of thumb, you can multiply the operating lease expense by 10 to obtain the liability amount of an potential capital lease (assumes a 10% interest rate)

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Debt-like item adjustment - pensions Pensions are something which will have to be paid and could be considered as debt items General overview

Adjustments for pension plans

 Most large companies have pension plans for their employees, to prepare them when they retire

 For this, the company will put some money on the side, invested in pension plans

 If a company has a funded pension plan then some

Unfunded plan

Present value of pension obligation $1,000

adjustments have to be made

Fair value of planed assets $600

― The adjustment is made only if the company has an

unfunded status on its pension plans ― If the company has an overfunded position, nothing is

taken into account

 In this case, the unfunded pensions plan is $400, meaning that, theoretically, if the company had to pay the pensions of all its employees it will be $400 short, will have a “debt” of $400

 This unfunded amount has to be taken tax free as considered as debt: $400 * (1 – tax rate)

 This information can be found in the note at the end of financial reports (10K, annual reports, 10Q, quarterly report) CoachingAssembly. All rights reserved. Any unauthorised copying, duplication, reproduction, re-selling, distribution or other commercial use will constitute an infringement of copyright

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Enterprise Value Calculation Enterprise Value Adjustments

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Enterprise Value adjustments Enterprise Value needs to be adjusted

Value of minority interests

Value of investment in associates and JV

Enterprise Value (excluding adjustments)

Enterprise Value

Total Enterprise Value (including adjustments)

Minority interests

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Investment in associates and JV

Total Enterprise Value, including adjustments 13


Other adjustment – minority interests Minority interests are considered as a debt liked item

Minority interests

How to adjust for minority interests?

 Minority interests appears when a company does not own 100% of a company but consolidate 100% of the profits of the subsidiary

― In the case below, 10% of the consolidated profits do no go to

 Minority interests are added to get to Enterprise Value  The value which has to be deducted correspond to the market value of the minority interests

company A and its shareholders

― In the P&L, a line “minorities” appears below “Total Net

Other shareholder

― We can apply a relevant PE multiple to this number and find

Income” and correspond to the profit attributed to minority shareholders the market value of the minority interests

Other shareholder

 For a quick and dirty analysis, the analyst can take the number in the liability side of the balance sheet corresponding to “Minority Interests”

Other shareholder

Company A

Owns 10%

Owns 90% but consolidated 100% of the profits

90% owned by company 1

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Total Net Income

$100

Net Income to shareholders

$90

Net Income to minority shareholders

$10

PE of 10.0x

Value of minority interests = $100 to be added 14


Other adjustment – investments in associates Adjustments which have to me done to get to the Enterprise Value concern Minority interests and investment in associates Investment in Associates and JV  Investment in Associates (or JV) appears when a company has a participation in another company and holds a minority stake ― In the case below, Company A has 10% stake of another

company. It accounts for the revenue in the P&L

How to adjust for Associates?  Investment in Associates are deducted to get to EV  The value which has to be deducted correspond to the market value of the investment in associates

― In the P&L, a line “revenue from associates” appears below

“EBIT” and correspond to the profit from associates

― We can apply a relevant PE multiple to this number and find

Other shareholder

the market value of the minority interests

 For a quick and dirty analysis, the analyst can take the number

Other shareholder

in the asset side of the balance sheet corresponding to “investment in associates and JV”

Other shareholder

Owns 90%

EBIT

$80 Revenue from associates

Company A

Owns 10% and accounts for the revenue of the associates in the P&L

90% owned by other shareholders

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$10

PE of 10.0x

Value of minority interests = $100 to be added 15

Coaching assembly enterprise value calculation  

Coaching assembly enterprise value calculation

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