The housing example didn't make sense to me. When you say your house is worth $1 million that is the price I could buy it for regardless of your mortgate situation. In corporate terms I could buy the company for the market cap by purchasing all the shares. So Enterprise Value is not the same as the price.
you have 200k and put down 100k on a house and use 400k in debt. if you are a business and have a house(worth 500k) plus 100k in cash, then your TA = 600k. TA = Liabilities (i.e. debt) + Equity. subtracting debt (400k) leaves 200k. if you ADD cash, then it is going the opposite direction, you should be subtracting cash(100k) to get to equity value (100k). This is why adding cash to calculate equity value does not make sense to me.
I think you're confused between Total Assets and Enterprise Value, because they are two completely different things. TA is $600k, but we are not discussing TA at all in this exercise. Think of Enterprise Value as the amount someone will pay for your business. If your business has a house ($500k) consisting of $300k in equity and $200k in debt, plus $100k cash, then if someone wants to buy your business, (for valuation purposes) immediately before the transaction, the buyer could ask you to use all your cash to pay down part of your debt. Hence, the enterprise value of your business is actually $300k equity + $100k debt remaining = $400k. So to go from Enterprise value to equity value, adding back cash is appropriate.
Good, straight to the point video
Is it appropriate to used enterprise value related metric to valuation very indebted company since it ignore the capital structure.
can i use NAV and add net debt to obtain the enterprise value?
The housing example didn't make sense to me. When you say your house is worth $1 million that is the price I could buy it for regardless of your mortgate situation. In corporate terms I could buy the company for the market cap by purchasing all the shares. So Enterprise Value is not the same as the price.
A Valuation of 2.5x would be perfect
you have 200k and put down 100k on a house and use 400k in debt. if you are a business and have a house(worth 500k) plus 100k in cash, then your TA = 600k. TA = Liabilities (i.e. debt) + Equity. subtracting debt (400k) leaves 200k. if you ADD cash, then it is going the opposite direction, you should be subtracting cash(100k) to get to equity value (100k). This is why adding cash to calculate equity value does not make sense to me.
I think you're confused between Total Assets and Enterprise Value, because they are two completely different things. TA is $600k, but we are not discussing TA at all in this exercise.
Think of Enterprise Value as the amount someone will pay for your business. If your business has a house ($500k) consisting of $300k in equity and $200k in debt, plus $100k cash, then if someone wants to buy your business, (for valuation purposes) immediately before the transaction, the buyer could ask you to use all your cash to pay down part of your debt. Hence, the enterprise value of your business is actually $300k equity + $100k debt remaining = $400k.
So to go from Enterprise value to equity value, adding back cash is appropriate.
@@caotou What if there is no debt in this scenario? (ie. $500k house + $100k cash) - in this case, would EV not be an appropriate valuation method?