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Right, those other claim holders represent reductions in the value of the company. If I borrow $300 billion (heh) and call myself a car company, that doesn't m

Right, those other claim holders represent reductions in the value of the company. If I borrow $300 billion (heh) and call myself a car company, that doesn't make me a more valuable company than Ford and Tesla combined - my net worth hasn't changed. Market cap == (perceived) value. Enterprise value is the COST TO PURCHASE the company, if I'm considering buying it. Like buying a used car and assuming payments: enterprise value (real cost) = purchase price + loan balance - coins under the seats Market cap is the cash I have to pay up-front Debt is the new debt I will have to pay when I own it. Cash-on-hand is the cash I get back when I buy it

MrPowers 7y ago
The enterprise value is the value of a company. enterprise_value = market_cap + debt - cash Different companies are capitalized differently - some use all equity, some all debt, some a mix. Not sure I agree that other claim holders represent reductions in the "value of the company". The same company can be capitalized different ways - the enterprise value for that company should be unchanged.
- kbutler 7y ago
  Hold market cap constant. Borrow $1 trillion. Burn the cash. Is the company now more or less valuable? By your formula, how has the enterprise value changed?
  - addicted 7y ago
    Absolutely. Enterprise Value is a metric used for acquisitions to determine the real cost of acquiring a company (that’s why cash lowers enterprise value, since it helps pay off some of the cost of acquiring the company, and liabilities increase the enterprise value because those are additional amounts of money you will Have to pump into the company).
  - bryanlarsen 7y ago
    > Is the company now more or less valuable? More. Normally burning a trillion dollars would have taken about a trillion off the market cap, so if it held steady that means a trillion dollar gain somewhere else.
    - kbutler 7y ago
      "There's a pony here somewhere!"
      - bryanlarsen 7y ago
        Yup, there's a pony buried in your assumptions.
  - hnews_account_1 7y ago
    Less valuable. What you're missing is that the reason debt is counted is because it is used to buy up assets. In this case, if the cash is entirely burned, it means the value of equity dropped to zero because debt typically has collateral. So the trillion dollars you borrowed would need to be paid back by selling the rest of the company's assets. So in reality, if let's say this trillion dollar debt was super senior and first claimant to assets. It'd drop to the previous market value of the company and the rest of the company's capital structure drops to zero.
  - MrPowers 7y ago
    This isn't "my formula" - it's the textbook finance formula: https://en.wikipedia.org/wiki/Enterprise_value https://en.wikipedia.org/wiki/Enterprise_value
- addicted 7y ago
  Enterprise Value is absolutely not the “value” of the company. The Enterprise value is the actual amount a company will cost you if you buy it at Market Cap. IOW, if you buy a company for a $100bn but it has liabilities of another $100bn that means it’s cost to you is actually $200bn, because you will also have to pay that additional $100bn. That’s why cash reduces the EV of a company, because if you pay $100bn for a company that has $50bn in cash, you effectively paid only $50bn (which is the EV). Market cap is the value of a company.
  - MrPowers 7y ago
    Market cap is the market value of a company's equity. market_cap = total_shares_outstanding * share_price I passed all three CFA exams a few years back and studied this extensively. I might be remembering incorrectly, but think you're making factually incorrect statements. Appreciate your comment and the motivation to think about this more. I recommend reading up on these terms: * market value of equity * book value of equity * intrinsic value of equity
  - deleted 7y ago
    [deleted]
NotSammyHagar 7y ago
If you borrow $300 billion you still have $300 billion in assets. Unless something unexpected changes, Ford won't be able to realize that Enterprise value. The number of car companies will shrink, not grow, evs are just the wave over the horizon that will really hurt them. Tesla actually has a chance to drastically grow their sales.
- kbutler 7y ago
  Right - $300 billion in assets, plus $300 billion in debts means the company is worth: a) $600 billion b) $300 billion c) $0 If you choose anything other than c, I'd love to sell you some businesses.
  - bryanlarsen 7y ago
    (B). The company is worth $300 billion to the bondholders, and $0 to shareholders, giving a total value of $300 billion. And that's assuming the company is being liquidated. Most companies with viable businesses are worth a lot more than their assets because the big part of the valuation is assumed future earnings.
    - Dylan16807 7y ago
      > The company is worth $300 billion to the bondholders, and $0 to shareholders, giving a total value of $300 billion. But if it was cash and debts instead of assets and debts, the company wouldn't be worth $300 billion to bondholders?
      - bryanlarsen 7y ago
        If you spend a dollar to buy a chocolate bar, you say the chocolate bar is worth $1 and that you spent $1. If you give a teller $1 for 4 quarters, you don't say that you spent $1.
        Dylan16807 7y ago

MrPowers 7y ago

The enterprise value is the value of a company. enterprise_value = market_cap + debt - cash Different companies are capitalized differently - some use all equity, some all debt, some a mix. Not sure I agree that other claim holders represent reductions in the "value of the company". The same company can be capitalized different ways - the enterprise value for that company should be unchanged.

kbutler 7y ago
Hold market cap constant. Borrow $1 trillion. Burn the cash. Is the company now more or less valuable? By your formula, how has the enterprise value changed?
- addicted 7y ago
  Absolutely. Enterprise Value is a metric used for acquisitions to determine the real cost of acquiring a company (that’s why cash lowers enterprise value, since it helps pay off some of the cost of acquiring the company, and liabilities increase the enterprise value because those are additional amounts of money you will Have to pump into the company).
- bryanlarsen 7y ago
  > Is the company now more or less valuable? More. Normally burning a trillion dollars would have taken about a trillion off the market cap, so if it held steady that means a trillion dollar gain somewhere else.
  - kbutler 7y ago
    "There's a pony here somewhere!"
    - bryanlarsen 7y ago
      Yup, there's a pony buried in your assumptions.
- hnews_account_1 7y ago
  Less valuable. What you're missing is that the reason debt is counted is because it is used to buy up assets. In this case, if the cash is entirely burned, it means the value of equity dropped to zero because debt typically has collateral. So the trillion dollars you borrowed would need to be paid back by selling the rest of the company's assets. So in reality, if let's say this trillion dollar debt was super senior and first claimant to assets. It'd drop to the previous market value of the company and the rest of the company's capital structure drops to zero.
- MrPowers 7y ago
  This isn't "my formula" - it's the textbook finance formula: https://en.wikipedia.org/wiki/Enterprise_value https://en.wikipedia.org/wiki/Enterprise_value
addicted 7y ago
Enterprise Value is absolutely not the “value” of the company. The Enterprise value is the actual amount a company will cost you if you buy it at Market Cap. IOW, if you buy a company for a $100bn but it has liabilities of another $100bn that means it’s cost to you is actually $200bn, because you will also have to pay that additional $100bn. That’s why cash reduces the EV of a company, because if you pay $100bn for a company that has $50bn in cash, you effectively paid only $50bn (which is the EV). Market cap is the value of a company.
- MrPowers 7y ago
  Market cap is the market value of a company's equity. market_cap = total_shares_outstanding * share_price I passed all three CFA exams a few years back and studied this extensively. I might be remembering incorrectly, but think you're making factually incorrect statements. Appreciate your comment and the motivation to think about this more. I recommend reading up on these terms: * market value of equity * book value of equity * intrinsic value of equity
- deleted 7y ago
  [deleted]

NotSammyHagar 7y ago

If you borrow $300 billion you still have $300 billion in assets. Unless something unexpected changes, Ford won't be able to realize that Enterprise value. The number of car companies will shrink, not grow, evs are just the wave over the horizon that will really hurt them. Tesla actually has a chance to drastically grow their sales.

kbutler 7y ago
Right - $300 billion in assets, plus $300 billion in debts means the company is worth: a) $600 billion b) $300 billion c) $0 If you choose anything other than c, I'd love to sell you some businesses.
- bryanlarsen 7y ago
  (B). The company is worth $300 billion to the bondholders, and $0 to shareholders, giving a total value of $300 billion. And that's assuming the company is being liquidated. Most companies with viable businesses are worth a lot more than their assets because the big part of the valuation is assumed future earnings.
  - Dylan16807 7y ago
    > The company is worth $300 billion to the bondholders, and $0 to shareholders, giving a total value of $300 billion. But if it was cash and debts instead of assets and debts, the company wouldn't be worth $300 billion to bondholders?
    - bryanlarsen 7y ago
      If you spend a dollar to buy a chocolate bar, you say the chocolate bar is worth $1 and that you spent $1. If you give a teller $1 for 4 quarters, you don't say that you spent $1.
      - Dylan16807 7y ago