Convert enterprise value to equity value

#CONVERT ENTERPRISE VALUE TO EQUITY VALUE PLUS#

In this case, enterprise value increased by $100,000 and equity value stays unchanged. LetР Р†Р вЂљРІвЂћСћs imagine that by making $100,000 of improvements, you have increased the value of your house by exactly $100,000. But the more interesting question is how the additional $100,000 in improvements affects enterprise value and equity value. Does that change the value of our house (our enterprise value)? Clearly not Р Р†Р вЂљРІР‚Сљ the additional borrowing put additional cash in our bank account, but had no impact on the value of our house.Р вЂќР’В®V ($500,000) = QV ($100,000) + ND ($400,000 + $100,000 Р Р†Р вЂљРІР‚Сљ $100,000)Р вЂќР вЂћt this point, a particularly clever analyst may answer Р Р†Р вЂљРЎС™thatР Р†Р вЂљРІвЂћСћs great, but what if you used that extra cash to make improvements in the house, like buying a subzero fridge and adding a jacuzzi? DoesnР Р†Р вЂљРІвЂћСћt net debt go up?Р Р†Р вЂљРЎСљ The answer is that in this case, net debt does increase.

We now have an additional $100,000 in cash and $100,000 in debt. Does adding debt and subtracting cash increase a companyР Р†Р вЂљРІвЂћСћs value? LetР Р†Р вЂљРІвЂћСћs see: Imagine we borrowed an additional $100,000 from a lender.

Plugging these data points into our enterprise value formula we get:Р вЂќР’В®V ($500,000) = QV ($100,000) + ND ($400,000).

On the other hand, the equity value represents only the value to the contributors of equity into the business.

Another way to think about it is to recognize that the enterprise value represents the value for all contributors of capital Р Р†Р вЂљРІР‚Сљ for both you (equity holder) and the lender (debt holder).

The value of the entire house Р Р†Р вЂљРІР‚Сљ $500,000 Р Р†Р вЂљРІР‚Сљ represents the enterprise value, while the value of your equity in the house Р Р†Р вЂљРІР‚Сљ $100,000 Р Р†Р вЂљРІР‚Сљ represents the equity value.

To finance the purchase, you make a down-payment of $100,000 and borrow the remaining $400,000 from a lender.

Imagine you decide to buy a house for $500,000.

#CONVERT ENTERPRISE VALUE TO EQUITY VALUE PLUS#

Enterprise valueР вЂ™Р’В definitionР вЂќР’В®nterprise value equals equity value plus net debt (where net debt is defined as debt and equivalents minus cash).Р вЂќР’В®nterprise value ( EV) = Equity value (QV) + Net debt (ND) Enterprise value exampleР вЂќР вЂћn easy way to think about the difference between enterprise value and equity value is by considering the value of a house: Adding debt will not raise enterprise value. The short answer is that it doesnР Р†Р вЂљРІвЂћСћt make sense, because the premise is wrong. If thatР Р†Р вЂљРІвЂћСћs the case, doesnР Р†Р вЂљРІвЂћСћt adding debt and subtracting cash increase a companyР Р†Р вЂљРІвЂћСћs enterprise value. I have often been asked the following question (in various permutations):Р вЂќР’В®nterprise value = equity value + net debt.

Convert enterprise value to equity value