Module 4: Enterprise Value/Comparables
Recruiting | Behaviorals | Accounting | Enterprise Value / Comparables | DCF | M&A | LBO| Market questions | Brain teasers
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Slide deck 3 is a comprehensive 41-slide presentation on Enterprise Value, Multiples, and Valuation Procedure provides an dive into company valuation. The initial 8 slides cover the concept of Enterprise Value, detailing its components and overarching significance. This foundation paves the way for the subsequent slides, which demystify valuation multiples like P/E, EV/EBITDA, and forward vs trailing multiples. The slide deck concludes with a section on valuation procedure and as always provides example questions and answers.
These questions are asked to test the candidate’s knowledge on critical concepts such as enterprise value and relative valuation metrics
Questions Include:
- What is the main difference between equity value and enterprise value?
- What is the formula for enterprise value?
- Why do we add back minority interest?
- Why do you subtract cash in the enterprise value equation?
- What’s the difference between market capitalization and shareholder’s equity?
- If a company has negative enterprise value, what does that mean?
- Why do companies issue preferred equity in the fi rst place?
- And many more!
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Enterprise Value Formula and Equity Value
Enterprise value and equity value are two core valuation concepts in finance, and understanding how to calculate and interpret them is fundamental for investment banking. This lesson covers the conceptual difference, the formulas, and why elements like preferred equity and net debt matter.
In this Lesson:
What Are Enterprise Value and Equity Value?
Enterprise value is the total value of a business, regardless of how it’s financed—like the full value of a house. Equity value is what the shareholders actually own, like the down payment after subtracting debt.House Analogy for Clarity
A $1M house financed fully with equity has $1M in equity value. But if it’s $750K debt and $250K equity, the enterprise value stays $1M—only the equity portion changes.Simple Enterprise Value Formula
Enterprise Value = Equity Value + Net Debt, where Net Debt = Debt – Cash. Cash is subtracted because it can be used to pay down debt.How to Calculate Equity Value
Equity Value = Share Price × Shares Outstanding. This reflects the total market capitalization of a company.Full Enterprise Value Formula
Enterprise Value = Equity Value + Debt – Cash + Preferred Equity + Minority Interest. Each component reflects capital that has a claim on the company before common shareholders.What Is Preferred Equity?
Preferred equity is a hybrid between debt and equity—investors get dividends (not interest) and rank above common equity in payout priority. It’s often used when a company can’t take on more debt but still wants to raise capital.Why Include Preferred Equity in EV?
Because preferred equity holders have a prior claim to cash flows, it behaves more like debt from a valuation perspective. Including it gives a fuller picture of what it costs to acquire the entire business.Why This Matters in IB
Enterprise value is used in valuation multiples (like EV/EBITDA), while equity value is used to determine share price. Bankers must adjust for capital structure accurately to value companies and structure deals properly.
EV / EBITDA vs. P / E and other key multiples
Valuation multiples are a core part of investment banking, and understanding the differences between EV/EBITDA and P/E is essential for comparing companies correctly. This lesson explains how to use each multiple, what they measure, and why adjustments like non-controlling interest are crucial for accuracy.
In this Lesson:
What Is a Multiple?
A multiple compares what you’re paying for a business to what you’re getting—like price per square foot when buying a house. In finance, it helps assess how expensive a company is relative to its earnings or cash flow.What Is EV / EBITDA?
EV/EBITDA compares total company value (Enterprise Value) to operating earnings before interest, taxes, depreciation, and amortization. It’s the most commonly used multiple in IB and PE because it’s capital-structure neutral.Why Numerator and Denominator Must Match
The numerator (EV) and denominator (EBITDA) must reflect the same percentage of ownership. If EBITDA includes 100% of a subsidiary’s earnings, then EV must also include 100% of its value.What Is Consolidation?
When a company owns over 50% of a subsidiary, it reports 100% of that subsidiary’s financials—even if it only owns part of it. This accounting rule inflates EBITDA beyond what equity holders truly own.The Role of Non-Controlling Interest (NCI)
NCI represents the portion of a subsidiary the parent company doesn’t own (e.g., 25%). We add NCI to Enterprise Value so that EV/EBITDA reflects the full 100% of the earnings being reported—making it apples-to-apples.Equity Value vs. Enterprise Value Multiples
Equity value-based multiples (like Price/Earnings) reflect returns to shareholders only. Enterprise value-based multiples (like EV/EBITDA or EV/Revenue) capture the full capital structure and are better for comparing operating performance.Why This Matters in IB
Using mismatched numerators and denominators leads to flawed valuations. Bankers must adjust for things like cash, debt, and NCI to ensure accurate and comparable multiples.
Comparables Analysis
Comparable company analysis is one of the most commonly used valuation methods in investment banking. This lesson walks through how to identify comps, calculate valuation multiples, and understand when and why this method is used.
In this Lesson:
What Is Comparable Company Analysis?
Comps involve valuing a company by comparing it to similar publicly traded firms. It’s like pricing a house by comparing it to other homes in the same neighborhood based on their current market value.Comps vs. Precedent Transactions
Comps use current public market data, while precedent transactions use historical M&A deals. Both use valuation multiples, but precedents often include a premium for control.Key Steps in Comps Analysis
First, identify 5–10 similar companies based on industry, size, geography, and financial metrics. Then calculate their valuation multiples like EV/EBITDA, EV/Revenue, and P/E.Finding the Median Multiple
Once you lay out all the key metrics, calculate the median multiple across the peer group. This median acts as the benchmark for valuing your target company.Applying the Multiple
Multiply the median multiple by the target company’s metric (e.g., EBITDA or EPS) to estimate enterprise value or equity value. This gives a market-based estimate of what the company is worth.Example: Chipotle Valuation
Chipotle was valued at ~$31–$32/share using industry comps, even though it was trading at $45.74. The premium was due to faster revenue growth, driven by store expansion.Why This Matters in IB
Comps are fast, widely understood, and rooted in real market data—making them a go-to tool for pitchbooks and valuations. Knowing how to run and interpret comps is a must-have skill in investment banking.
Precedent Transactions
Precedent transactions analysis is a core valuation method that looks at prices paid in real M&A deals to estimate what a company is worth. This lesson explains how to find relevant deals, calculate valuation multiples, and understand when this method provides higher or lower valuations than comparables.
In this Lesson:
What Is Precedent Transactions Analysis?
This method values a company by analyzing the multiples paid in past acquisitions of similar companies. It reflects actual buyer behavior in real M&A situations, including control premiums and synergy expectations.Key Steps in the Process
Identify 5–10 deals from the last 3–5 years with similar industry, size, geography, and financial characteristics. Then extract enterprise value, revenue, and EBITDA to calculate EV/EBITDA and EV/Revenue multiples.How to Apply the Multiple
Find the median multiple from your selected transactions. Multiply that median by your target company’s EBITDA (or revenue) to arrive at an implied enterprise value.Why Precedents Often Yield Higher Valuations
Buyers in M&A typically pay a premium—often around 30%—to gain control and realize synergies. This “control premium” means precedent transactions usually result in higher valuations than public comps.When Precedents Can Be Lower Than Comps
If market conditions have improved since the deals were done, comps may reflect higher valuations. Smaller deal size, private company discounts, or weaker financials in the target companies can also lower precedent valuations.Chipotle Example
Chipotle’s precedents showed lower EV/EBITDA multiples than its comps, largely due to smaller transaction sizes. Median precedent deal size was $1B, compared to comps with enterprise values around $26B.Why This Matters in IB
Precedent transactions are essential in pitch books and fairness opinions. They provide a reality check on what strategic or financial buyers are actually willing to pay in the market.
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