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The enterprise value is the value of a company. enterprise_value = market_cap + debt - cash Different companies are capitalized differently - some use all equ

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]

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]