Valuation, 7th Edition

16Moving from Enterprise Value to Value per Share

When you have completed the valuation of core operations, as described in Chapter 10, you are ready to estimate enterprise value, equity value, and value per share. Enterprise value represents the value of the entire company, while equity value represents the portion owned by shareholders.

To determine enterprise value, add nonoperating assets to the value of core operations. The most common nonoperating assets are excess cash, investments in nonconsolidated companies, and tax loss carryforwards.¹ To estimate equity value, subtract all nonequity claims from enterprise value. Nonequity claims include short-term and long-term debt, debt equivalents like unfunded pension liabilities, and hybrid securities like convertible securities and employee stock options. Finally, to estimate the intrinsic value per share, divide the resulting equity value by the most recent number of shares outstanding.

While nonoperating assets and nonequity claims may feel like an afterthought, this is not the case. Many sophisticated investors have discovered substantial value hidden in nonoperating assets, especially in privately held conglomerates. In contrast, other investors have been burned by not accurately identifying and valuing all nonequity claims against enterprise value, as happened in the well-publicized case of Enron. It is critical to know who has a claim on cash flow before equity holders do.

This chapter lays out the process for converting ...