Investment Banking Bootcamp: Week 4 – Equity and Enterprise Value Fall 2018 [whoever is presenting]

Agenda I. Equity Value II. Enterprise Value III. Equity Value <--> Enterprise Value IV. How Events Impact Equity and Enterprise Value V. Metrics and Multiples VI. Practice Questions Please take notes and ask questions throughout. Decks will be available on our website.

I. Equity Value

What Is Equity Value? Basic definition: Also known as “market cap” or “market value,” equity value is the value of all assets to equity shareholders Formula: Share price * # of fully diluted shares outstanding

II. Enterprise Value

What Is Enterprise Value? Basic definition: Enterprise value is the value of core business assets to all investors Core business asset: essential to the production of your product or service; without asset, cannot generate revenue Cash is NOT a core business asset Independent of capital structure, meaning changes in debt and equity do not affect enterprise value Ex: raising debt has no impact

III. Equity Value < -- > Enterprise Value

Relationship between Equity and Enterprise Value Equity Value Plus: Total Debt Plus: Preferred Stock Plus: Noncontrolling Interest Less: Cash / Cash Equivalents = Enterprise Value Value to debt investors, preferred investors and noncontrolling interest investors Non-core business asset

Debt & preferred investors get paid here Continued… As you move down the Income Statement, you start eliminating different investor groups as they receive their payment Net sales COGS Gross Profit SG&A Expenses Operating income Interest (Expense) income, net Other expenses Net income Debt & preferred investors get paid here “Other expenses” are non-core, so income following this iline items corresponds to equity value

IV. How Events Impact Equity and Enterprise Value

How Events Affect Equity and Enterprise Value Issuing New Shares Equity Value increases Enterprise Value stays the same because the increase in cash from shares cancels out the increase in Equity Value Remember that EV = Equity Value – cash + debt + preferred + noncontrolling Issuing Dividends Equity Value decreases Enterprise Value stays the same because decrease in cash cancels out the decrease in Equity Value Raising Debt Neither Equity nor Enterprise Value changes Raising $200M of Debt to Buy $200M Company 1. Raising debt won’t impact either 2. Buying $200M company will increase EV by $200M

V. Metrics and Multiples

Common Metrics and Multiples Metrics that represent ONLY equity investors pair with Equity Value Metrics that represent ALL investors pair with Enterprise Value Used to determine whether a company is under / overvalued by comparing multiple to other comparables Ignores individual countries’ taxation policies EV/ EBITDA or EV/EBIT Same idea as EV / EBITDA Need to compare several multiples for accurate comparables valuation EV/Revenue Unlevered FCF is FCF pre-debt interest payments EV/Unlevered FCF Equity Value is paired with Net Income because Net Income is what’s available to equity investors Equity Value/Net Income Levered FCF is post-debt interest payments Equity Value/Levered FCF

V. Practice