Valuation: Measuring and Managing the Value of Companies, Fifth Edition

12

Moving from Enterprise Value to Value per Share

When you have completed the valuation of core operations, as described in Chapter 6, 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 to the value of core operations the value of nonoperating assets, such as excess cash and nonconsolidated subsidiaries. To convert enterprise value to equity value, subtract short-term and long-term debt, debt equivalents (such as unfunded pension liabilities), and hybrid securities (such as employee stock options). Finally, to estimate value per share, divide the resulting equity value by the most recent number of undiluted shares outstanding.¹⁴⁵

When converting core operations to enterprise value, be sure to follow these two guiding principles: (1) avoid double-counting, and (2) evaluate interdependencies between the value of core operations and the value of nonoperating assets. To avoid double-counting, take care not to value separately any asset or liability embedded in free cash flow. For instance, nonconsolidated subsidiaries are typically treated as nonoperating because any income generated by nonconsolidated subsidiaries appears in the parent company’s nonoperating income, not in earnings before interest, taxes, and amortization (EBITA). That income must therefore be valued separately from EBITA. Conversely, ...