Equity Value and Enterprise Value Interview Questions: What to Expect (17:10)

Questions about Equity Value and Enterprise Value include their basic definitions and meaning, calculations for both based on sample share counts, share prices, and Balance Sheets, and explanations of how to pair certain financial metrics with one or the other.

They may also ask you about why Equity Value or Enterprise Value change after specific company events, and how much they change by, as well as how “real-life” events impact both metrics.

The most important points and principles for answering these questions are as follows:

Equity Value: The value of EVERYTHING a company has (Net Assets, i.e., Total Assets – Total Liabilities), but only to EQUITY INVESTORS (i.e., common shareholders)

Enterprise Value: The value of the company’s CORE BUSINESS OPERATIONS (Net Operational Assets, i.e., Operational Assets – Operational Liabilities), but to ALL INVESTORS (Equity, Debt, Preferred, and possibly others)

The significance of these is that Equity Value changes when the company’s capital structure changes, but Enterprise Value does not – at least, not in theory, which makes it useful for analyzing and valuing companies.

Equity Value Calculation: Diluted Shares * Current Share Price

To calculate diluted shares, take the basic shares from the company’s filings and add dilution from options, warrants, RSUs, convertible bonds, and other dilutive securities.

Use the Treasury Stock Method (TSM) for options and assume the employees exercise their options, the company gets the proceeds, and then it uses the proceeds to repurchase some of the shares.

Enterprise Value Calculation: Equity Value – Non-Operating Assets + Liability & Equity Items that Represent Other Investors

The most common Non-Operating Assets are Cash, Investments, and Associate Companies or Equity Investments. The most common L&E line items here are Debt, Preferred Stock, and Noncontrolling Interests.

Think of Valuation Multiples as “per square foot” or “per square meter” values for houses – let you normalize for companies’ sizes.

If the metric deducts Net Interest Expense (and Preferred Dividends, if applicable), pair it with Eq Val; otherwise, use TEV in the valuation multiple.

Does Common Shareholders’ Equity change? If so, then Equity Value changes; if not, Eq Val does not change.

Do the Net Operating Assets change? If so, then TEV changes. If not, then TEV does not change.