Two operating businesses can have the same enterprise value while their shareholders receive different common equity values. Debt and other claims explain the difference.
When you compare companies, first identify whose investment you are valuing. Common equity value is the value belonging to common shareholders after other capital providers' claims. For a public company, its market capitalization, or market cap, equals current share price multiplied by shares outstanding.
At $30 per share with 20 million shares outstanding, market cap is $30 × 20 million = $600 million. Use the valuation date's shares, and sum separately priced common share classes when necessary. Market equity value reflects investors' pricing; reported stockholders' equity records accounting amounts.
Enterprise value (EV) measures the operating business across its capital providers. A company's capital structure is its mix of debt, preferred stock, and common equity financing. EV helps you compare operations when companies use different financing mixes.
EV = market cap + total debt + preferred equity + minority interest − cash and equivalents.
Common mistakes
- Stopping at enterprise value: In Example 1, $320 million is operating value; the common equity amount is $240 million.
- Treating cash as a claim: With $150 million debt and $40 million cash, subtract net debt of $110 million, not $190 million.
- Using EBIT unchanged: Example 2 requires adding $12 million depreciation and amortization before normalizing EBITDA.
Bottom line
- EV equals market cap plus debt, preferred equity, and minority interest, minus cash and equivalents.
- Common equity value reverses the EV bridge before division by the appropriate share count.
- EV/EBITDA and EV/sales use enterprise value; the listed price multiples use equity value.
- Adjusted multiples require consistent definitions and support for changes to earnings or value.
Exam shortcut
Label the requested answer first: EV, common equity value, or price per share. Write the multiple's denominator beside the supplied financial measure. Convert EBIT to EBITDA before multiplying when necessary. After an enterprise multiple, cross out each senior claim as you subtract it, then add eligible cash. Divide by shares last. When two answers differ by cash, preferred equity, or dilution, audit that bridge input before recalculating everything.
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Learning objectives
- A5
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