Interview prep · EV & Equity Value
EV & Equity Value interview questions
Enterprise value vs equity value, the bridge between them, fully-diluted shares via the treasury stock method, and which multiples pair with which.
Sample questions
What's the difference between enterprise value and equity value?+
Equity value (market cap) is the value attributable to shareholders. Enterprise value is the value of the core operating business to all capital providers - debt and equity. Bridge: EV = equity value + total debt + preferred + minority interest - cash & equivalents.
Why do you subtract cash when going from equity value to enterprise value?+
EV represents the cost to acquire the operating business. Cash is a non-operating asset that an acquirer effectively gets back (it can be used to pay down the purchase or the debt assumed), so it reduces the net price. Conceptually, you net cash against the debt you're assuming.
Which valuation multiples pair with enterprise value vs. equity value, and why?+
EV pairs with metrics available to all capital providers and before financing: EV/EBITDA, EV/EBIT, EV/Revenue. Equity value pairs with after-debt, post-tax metrics that belong to shareholders: P/E (price/EPS) and price/book. You must match the numerator's claimants to the denominator's.
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