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Can anyone please explain, why the company value changes, when a company buys assets?? — Preceding unsigned comment added by 92.74.154.167 ( talk) 14:15, 18 March 2020 (UTC)
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The edition I overwrote included a lot about how EV is 'correct' or 'better'. It isn't. It measures a different thing. There was also stuff about how it measures a take over value. This is very wrong. While it might be used by someone buying just the assets (who would then apply their own cost of capital and taxes onto it), it will never be a takeover value because it ADDS the debt value. You never pay MORE for privilege of assuming debt. Retail Investor 18:57, 25 November 2006 (UTC)
Subtracting cash in EV calculation makes all the sense. The company's cash flows, post WC and and Capex, have to be divided between the funding entities of the company, equity and debt holders. If you have 100USD in cash, you can repay debt holders and leave more of the future cash available for equity holders. Net debt therefore makes sense. A doubts arises when we do not consider receivables as cash. Eventually they will materialize into cash. Imagine a company decides to sell (securitize) all of its receivables to athird party in exchange for cash (assume no bad receivables). This would influence the net debt value, therefore equity value even when the fundamental value of the company has not changed. Any suggestions? [[User:Cash Investor] —Preceding unsigned comment added by 193.238.54.20 ( talk) 10:06, 18 April 2011 (UTC)
I deleted the reference to cash in the equation, because the value of cash is already included in the market value of the common equity. Retail Investor 18:57, 25 November 2006 (UTC)
I don't agree. Cash is an asset like any other. EV measures the market value of the assets. Those assets are owned (and valued) by the long-term debt and equity owners. EV measures the total.
In reality EV measures the market value of owning all non-cash assets of a company, including intangibles and brand, and being obligated by all liabilities that have no expectation of a return (like payables, etc.). Because EV is used in models containing some profit/cash flow, it is used in metrics of return. Free cash can't be expected to create a return from this perspective, and the owner will have no obligation to create return for the remaining liabilities.
Some EV definitions exclude cash; others do not. Those that do clearly do not agree that "cash is an asset like any other." It is the only asset being purchased that can immediately be used to help with the purchase price. For example. You sell me a car for $10,000 and we both acknowledge that the stereo, tires, etc. plus a $1,000 bag of cash in the trunk all come with the car for the agreed price. Once you give me the car, I will give you the cash. I only need to show up to the transaction with $9,000. —Preceding unsigned comment added by 75.53.43.103 ( talk) 03:47, 13 June 2009 (UTC)
If EV doesn't value the total of assets. And it doesn't measure the market value of all owners, what DOES it measure? Why would one define 'on-going' as everything but cash?
Why? You normalize for the capital structure, not the assets.
Consider two companies with exactly the same balance sheet except the second has excess cash of $10,000. The market value of their debt will be exactly the same. The market value of the common equity will be $10,000 higher for the second company. Your equation says that the EV of both is the same. Why on earth? The second has $10,000 more assets. Why is it not worth $10,000 more?
It is worth $10,000 more, and that will be reflected in the market value of the equity (if the market is efficient). But that $10,000 need not be possessed to buy the company. It could be borrowed for a day.
Theoretically, this is wrong. A dividend paid to investors in theory reduces the share price by the amount of the dividend on the ex-dividend date. Thus, the cash decreases while the market cap also decreases by an identical amount. Thus the EV stays the same. Likewise, paying down debt reduces both cash and debt simultaneously, keeping EV the same. That's how it is capital structure neutral. Otherwise, a company could reduce its EV by paying dividends / debt.
And that dividend makes the second company worth more before the payment than after it has been paid out. Cash is an asset, not 'a component of capitalization'. Capitalization is about who OWNS the assets. It has nothing to do with the assets themselves.
This example doesn't prove anything. There is only one company. The point of EV is to normalize between two different companies. My example above proves the second company is more valuable, because the new owners of it could take a $10,000 dividend. AND they would still have the company
Quoting someone else is no argument. If you are an investor, you know that "fainess opinions" are anything but fair.
The Enterprise Value is NOT what one theoretically pays to the current owners (equity) to purchase the company. That value is essentially the Market Cap. It's the amount of money one must produce to buy out a business free and clear (while pocketing no cash). You state no one would pay $10 more for the right to assume $10 debt. That's correct. The $10 is NOT in the theoretical buyout paid to the equity to assume the debt. Subsequently to buying out the equity the $10 is paid to the debtholders to eliminate the debt. Likewise, a company with $10,000 more in cash would have a lower EV, since that cash is used either in the purchase or debt payoff and thus doesn't need to be possessed by the potential buyer.
The phrase "EV/EBITDA measures the payback period of the whole capital structure" is incorrect, or at least unclear. It cannot represent any sort of "payback" because EBITDA leaves out, among other things, significant cash flow items such as capital expenditures and changes in working capital. I'm going to revert back to my language on EV/EBITDA because I think it points out the more relevant information and I think the comparison to P/E multiples is helpful. The language could use be more concise though, so I'm open to those type of edits. I also made some formatting changes to the formula. mullacc 00:41, 30 November 2006 (UTC)
Well, it'd be helpful if you explained what you meant by a payback period.
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Can anyone please explain, why the company value changes, when a company buys assets?? — Preceding unsigned comment added by 92.74.154.167 ( talk) 14:15, 18 March 2020 (UTC)
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The edition I overwrote included a lot about how EV is 'correct' or 'better'. It isn't. It measures a different thing. There was also stuff about how it measures a take over value. This is very wrong. While it might be used by someone buying just the assets (who would then apply their own cost of capital and taxes onto it), it will never be a takeover value because it ADDS the debt value. You never pay MORE for privilege of assuming debt. Retail Investor 18:57, 25 November 2006 (UTC)
Subtracting cash in EV calculation makes all the sense. The company's cash flows, post WC and and Capex, have to be divided between the funding entities of the company, equity and debt holders. If you have 100USD in cash, you can repay debt holders and leave more of the future cash available for equity holders. Net debt therefore makes sense. A doubts arises when we do not consider receivables as cash. Eventually they will materialize into cash. Imagine a company decides to sell (securitize) all of its receivables to athird party in exchange for cash (assume no bad receivables). This would influence the net debt value, therefore equity value even when the fundamental value of the company has not changed. Any suggestions? [[User:Cash Investor] —Preceding unsigned comment added by 193.238.54.20 ( talk) 10:06, 18 April 2011 (UTC)
I deleted the reference to cash in the equation, because the value of cash is already included in the market value of the common equity. Retail Investor 18:57, 25 November 2006 (UTC)
I don't agree. Cash is an asset like any other. EV measures the market value of the assets. Those assets are owned (and valued) by the long-term debt and equity owners. EV measures the total.
In reality EV measures the market value of owning all non-cash assets of a company, including intangibles and brand, and being obligated by all liabilities that have no expectation of a return (like payables, etc.). Because EV is used in models containing some profit/cash flow, it is used in metrics of return. Free cash can't be expected to create a return from this perspective, and the owner will have no obligation to create return for the remaining liabilities.
Some EV definitions exclude cash; others do not. Those that do clearly do not agree that "cash is an asset like any other." It is the only asset being purchased that can immediately be used to help with the purchase price. For example. You sell me a car for $10,000 and we both acknowledge that the stereo, tires, etc. plus a $1,000 bag of cash in the trunk all come with the car for the agreed price. Once you give me the car, I will give you the cash. I only need to show up to the transaction with $9,000. —Preceding unsigned comment added by 75.53.43.103 ( talk) 03:47, 13 June 2009 (UTC)
If EV doesn't value the total of assets. And it doesn't measure the market value of all owners, what DOES it measure? Why would one define 'on-going' as everything but cash?
Why? You normalize for the capital structure, not the assets.
Consider two companies with exactly the same balance sheet except the second has excess cash of $10,000. The market value of their debt will be exactly the same. The market value of the common equity will be $10,000 higher for the second company. Your equation says that the EV of both is the same. Why on earth? The second has $10,000 more assets. Why is it not worth $10,000 more?
It is worth $10,000 more, and that will be reflected in the market value of the equity (if the market is efficient). But that $10,000 need not be possessed to buy the company. It could be borrowed for a day.
Theoretically, this is wrong. A dividend paid to investors in theory reduces the share price by the amount of the dividend on the ex-dividend date. Thus, the cash decreases while the market cap also decreases by an identical amount. Thus the EV stays the same. Likewise, paying down debt reduces both cash and debt simultaneously, keeping EV the same. That's how it is capital structure neutral. Otherwise, a company could reduce its EV by paying dividends / debt.
And that dividend makes the second company worth more before the payment than after it has been paid out. Cash is an asset, not 'a component of capitalization'. Capitalization is about who OWNS the assets. It has nothing to do with the assets themselves.
This example doesn't prove anything. There is only one company. The point of EV is to normalize between two different companies. My example above proves the second company is more valuable, because the new owners of it could take a $10,000 dividend. AND they would still have the company
Quoting someone else is no argument. If you are an investor, you know that "fainess opinions" are anything but fair.
The Enterprise Value is NOT what one theoretically pays to the current owners (equity) to purchase the company. That value is essentially the Market Cap. It's the amount of money one must produce to buy out a business free and clear (while pocketing no cash). You state no one would pay $10 more for the right to assume $10 debt. That's correct. The $10 is NOT in the theoretical buyout paid to the equity to assume the debt. Subsequently to buying out the equity the $10 is paid to the debtholders to eliminate the debt. Likewise, a company with $10,000 more in cash would have a lower EV, since that cash is used either in the purchase or debt payoff and thus doesn't need to be possessed by the potential buyer.
The phrase "EV/EBITDA measures the payback period of the whole capital structure" is incorrect, or at least unclear. It cannot represent any sort of "payback" because EBITDA leaves out, among other things, significant cash flow items such as capital expenditures and changes in working capital. I'm going to revert back to my language on EV/EBITDA because I think it points out the more relevant information and I think the comparison to P/E multiples is helpful. The language could use be more concise though, so I'm open to those type of edits. I also made some formatting changes to the formula. mullacc 00:41, 30 November 2006 (UTC)
Well, it'd be helpful if you explained what you meant by a payback period.