Okay, everyone. Well, I'm going to have a go at it as my friends across the pond say, so we only have a little bit of time and we're starting some of the more, you know, advanced concepts, so to speak, kind of that jump from analysis, modeling into valuation, which will hopefully be fun.

So, this session today is called the Equity to Enterprise Value Bridge.

I am your, host instructor for the day, Chris Cordone.

Again, financial Edge instructor, longtime one at that. And I've got my colleague, Yolanda Wadowski here as well, who's gonna be our TA. So we have a Q&A section. You can put your comments in there. We've got also the ability to respond via chat. Not everybody can see the chat.

So if you can use the Q&A function, that would be great.

What we're gonna do today, lemme just pop over to the core syllabus, is in this November one, hard to believe, hard to believe. November one, equity to enterprise value bridge. This is the workout we're going to use.

And obviously this is our Felix video playlist, and this is going to be here for you to, you know, have a recap or, you know, for anyone who's, who's not able to join today, can go back and, you know, take a look at that. Obviously, if at any of the, any of these sessions you can't make, you can always go back and see the video playlist.

It won't be the recording of this session. In this case, this'll be one that we've already done, which is better in a sense because it's, it's a little bit, maybe perhaps, you know, kind of more comprehensive, may cover some nooks and crannies that I don't get to in, in two hours.

But in general, we're teaching from the same, same kind of material set and trying to cover the same ground.

So I've also got some notes here, which I'll post at the end, and I'm gonna kind of get into that.

Just in advance warning, I will be drawing a lot of boxes in the next few sessions, and I'm trying to figure out how to get better at it or maybe do it a different way. But this is my box drawing, kind of extravaganza.

So, equity to enterprise value bridge.

Well, you know, where we are with this is that we're starting to talk about valuation.

How do we, how do we value something, right? Well, first of all, you know, I think in general it depends on what it is that we're trying to value, right? What, what is our perspective here? How do we value we're gonna go into the actual, you know, methodologies one by one the next few weeks.

But just sort of as an overview, you know, in terms of like, how do we value that's, it sounds like I'm asking you like, what, what are the techniques? It also to me implies sort of like, what is our perspective? What is your perspective from this valuation vantage point? Are we valuing the equity of a business? Valuing the equity of the business would be like valuing the stock. Are we looking at this from a stock investor, kind of equity investor equity research perspective, right? Are we looking at, at buying a share of stock? Are we looking at this from an M&A perspective where we're actually trying to consider the value of one company buying another company, or one investor buying another company? Valuing the business itself. Now, I say that because you can buy an entire company.

You can also just buy a product line or a group of assets or, a division.

So this is something that we would kind of have to consider this would be kind of the M&A perspective, maybe from a strategic point of view.

We also might consider the value to a financial buyer.

A financial buyer would be somebody who's buying from a non-strategic point of view. I mean, strategic perhaps from the, from the strategy of their fund, from the strategy of their investor base.

But they're not buying it because it's, you know, the company represents, a geographical advantage or an extension of a product line or, or perhaps a kind of a supply chain enhancer.

So we've got the value from a financial sponsor.

So these are kind of different ways that we can sort of look at the lens of valuation.

I'll also put here value individual assets here, because that's something that we could do.

So I'm gonna save kind of the discussion of the various sort of techniques as for next week.

Because that's when we start that. But I think it's important, I'm just gonna change this right now, To what are we valuing? I wanna make sure that we understand going into that conversation, This point of view as to how do we approach this process of determining the value of something. Well, it starts with an understanding of the components of value.

And the components of value in, in a business are really represented by the bridge, the, the bridge from equity value to enterprise value.

So when we talk about equity value, I think it's sort of the easier place to start. So I'm gonna start there.

When we talk about equity value, what we talk about or the kind of, the first thing that usually comes to mind is the public kind of value of equity, right? The public value of equity, which we would call either the share price, right? The share price of something, or if you're looking at more holistically the market capitalization, right? Market capitalization. Now, the market capitalization is effectively just a share price of a, of a company, a publicly traded company, times the number of shares.

So this is share price times shares. So the first thing you know, that I want to introduce here is the share, the share count, or the share issue. If we were to, if we were to go to, you know, the equity section of any company, and I'll just go over to Felix right now and I'll take a look at lemme just take a look at Intel.

If we were to go to their balance sheet, the balance sheet would of course, not be telling us what the market cap is, the market, the balance sheet would be telling us actually what the book value of the equity is, right? So the book value of the equity would be kind of what the equity was worth when the company perhaps sold those shares to the public, right? So, one thing we have to do here is we have to establish that this market Issue is really kind of the core of valuation, right? It's as I like to say, it's balance valuation is a balance sheet challenge.

We're trying to take a balance sheet, which has been recorded at historical cost for the most part, with a few exceptions here and there, and bring it up to a market value so that it can be acquired by someone. So obviously, with the equity section of the balance sheet, we kind of have a nice some work done for us here, because the share price, again, times the shares outstanding is gonna tell us what that is. So, if I go here, over here to Intel and I take a look at their, enterprise value bridge, and this is what we're gonna be breaking down today, we can see that they have a current market cap of about a hundred and, 158 billion, 159 billion almost. Now, before I get to, to ahead of myself, I wanted to kind of break that down into a sort of a discussion of, um, share price and shares outstanding share price.

Pretty easy to get because anybody with, you know, access to real data, and at this point it's anybody with internet connection we can figure out what the, what the share price is.

So what we've got here for Intel is a $36 and 50 cents share price. That's as of the last close, which would, at this point be today.

And now we need to multiply that by shares. Okay? So let's go over to the balance sheet and take a look at what that means.

If I go into the equity section for Intel, the equity section is telling me that in this, in this reporting, they've got a few different components of equity. Now, the, the, the common stock, right, is typically what we're looking at when we're talking about the value of a company's shares. And that's the residual value. That's, that's kind of what's left over after everything has already been kind of taken out. So if we look at this common stock, what we see is they've got a few different kinds of shares they've got authorized, and then they've got something called issued and outstanding.

So when we think about shares, we have to understand that there's a few different kinds of metrics that are used. We've got authorized shares, we've got issued shares, and we've got outstanding shares. Now, what are the differences between these? Well, the authorized shares would be in effect what the company has sort of the permission from the board to issue. Now, why is that important? Well, it's important, obviously, if they're raising capital, you know, for the first time.

But it's also important for follow on offerings as well.

So if they have a certain number of shares that are authorized, that means that they kind of have the permission of the board to issue more shares under that cap.

So this is sort of the cap established by the board of directors.

The issue shares would be the shares that have actually been issued under that cap. Now, that means that first step is to get the authorization. Second step would be to go ahead and sell that equity to the public.

So these are the shares that are sold to the public to raise capital.

Now, you might say, well, after that, what else really is there? Well, companies also have the ability to, to buy back shares to repurchase shares. So the outstanding shares would be the, the shares that are currently trading in the market adjusted, or treasury shares or repurchases.

So companies can in effect, go into the public market, buy back capital, which in effect reduces or lowers their equity capitalization. Now, why would they do that? Well, they do that for a number of reasons. They buy back shares because they are looking to return value to shareholders.

When share accounts go down, think about it this way, you know, if you've got a shareholders base that's, a certain number of shares outstanding, right? If you sell more equity, what happens? Well, your, your shares outstanding go up.

That means everybody's piece of the pie has just shrunk, right? So when a company goes out and buys back shares, they're effectively shrinking the share count, but not in actuality shrinking the earnings, right? So you've effectively increased everyone's share of that high.

It's a mechanism that's done to return value to shareholders, right? So this is to return value to shareholders. And this has become a very, very, very, very common strategy for companies. And it's done to, obviously, please, shareholders. It's also done by companies as a way to kind of replace another way of paying of returning value to shareholders, which is the dividend, right? So, if we think about a way that companies can make shareholders happy, well, you could pay a dividend.

And there are many companies which pay regular dividends over time, those are very stable, very mature companies that have very kind of steady cash flows and steady earnings. Well for companies perhaps that are, that have been growth companies, companies that have been in effect using their earnings, their retained earnings to put back into the company to grow the company at a certain point, these kinds of companies run out of opportunities to grow.

So they're taking shareholder capital, which is in the form of retained earnings, right? That would be, if I go back over to Intel, that would be this retained earnings amount, right? The income that they're putting into the company as opposed to paying it out.

Well, as those opportunities for growth start to shrink, then what happens is, you know, the, the, the company's returns start to also go down because you're taking capital from your equity investors, but you're not putting it to use in a way that's yielding the kind of return that would satisfy them. So if you're an equity investor, you're gonna speak up at some point.

And so companies get to this point where perhaps they're not ready to start paying regular dividends, or they don't really see that as a viable strategy.

One thing that they can do is put into place these share buybacks, and these share buybacks will, will accomplish effectively the same thing.

So, when we look at, share price times shares outstanding, what we're doing is we're, we're looking at these shares that are, that are actually trading in the market. Now, next week, we will go through a more detailed calculation of what this involves. I'm not, I'm not gonna do that today because it would just eat up too much of the time. It's just better applied next week when we're getting into some more examples.

But the shares outstanding point is very important. Now, I said off the bat that the balance, the valuation challenge is a balance sheet challenge, right? The valuation is a balance sheet challenge.

So we think about how we defined a balance sheet at some point. I believe, in the last few weeks, or perhaps in your other, other training that you've had a balance sheet in terms of a financial statement is a point in time. So the concept of shares outstanding, imss share price, the share price is the share price as of today, or last close, because I'm valuing the company as of today or last close, I also need to then have a shares outstanding number that matches that point in time. So, it is important that we are using these shares outstanding as of a certain moment. Now, I bring this up because we're talking about, you know, we're talking about shareholder value. We're talking about earnings, we're talking about retained earnings and plowing money back into, into the business. I'm talking about that the point of, the purpose of treasury stock being to give equity investors a greater piece of the earnings pie. You know, we also use shares outstanding for or calculating earnings per share.

And if I were to go over to their income statement, we would see, on the income statement that we've got a shares outstanding calculation kind of done for us here. And that, of course, is done by accountants. These are audited statements.

And what the accountants are doing here, of course, is trying to match the earnings, which happen over a long period of time, a quarter or a year, to the shareholder base that was outstanding over that same period.

So that brings in this concept of weighted average shares outstanding.

So weighted average shares outstanding is not a point in time.

It's a blended average over a period of time, and that is more appropriate for earnings. But we have a balance sheet problem.

And the balance sheet problem is telling us that I need to know, I wanna buy this company today.

I need to write a check today to these equity investors who owns the stock today. And that shares outstanding. So shares outstanding is used, the kind of, is a term that might be used a number of different ways.

We wanna make sure we're using it for a point in time. Now, whenever we're talking about market capitalization, whenever we're talking about almost anything in the realm of valuation, we are talking about a fully diluted value. Now, I'm gonna leave you with a bit of a cliffhanger on that, because I'm gonna go back and kind of flesh that out for us next week.

But just so that we kind of have it, you know, in our heads, is something to come back to fully diluted shareholder value is what we're looking for. So anytime, anytime you're, you're looking in the realm of finance at an earnings per share number at that's perhaps being used for, PE ratio or in an earnings forecast anytime you, you see market capitalization, it is a fully diluted basis.

And I will, again, gonna go back into that more next week, but it's a term I'm probably gonna throw it around at some point today. And I wanna make sure that we have at least we have at least established that we're always talking about fully diluted in the context of valuation. We're almost never talking about, about the basic value of something, which would be again, this basic share calculation. We're almost never doing that.

In fact, the only, the only time I could possibly think that we might is if we were actually paying a dividend to somebody, because if you think about paying a dividend, you're paying a dividend to shareholders who actually own the stock, right? So that would be a basic dividend. So I'll go into more of that again next week now.

So basic fully diluted shares, outstanding shares issued, shares authorized. These are things, we're just gonna spend a couple of seconds now in a workout just kind of going through to make sure that we understand this concept of market cap. Now, I'm gonna switch back over here, or switch over here to the workout, which we looked at on the syllabus.

And I'm just gonna go through a couple of quick problems just so that we can, you know, say that we did it. We have an example here, workout one where we have a share price that's been given.

We have authorized shares, we have issued shares, and we have shares held in treasury.

We've also been given the weighted average shares outstanding.

So how are we going to calculate the equity value here? How are we gonna calculate that? Well, the one thing that I told you we haven't been given, and that's the shares outstanding.

So the first thing I'm gonna do is I'm actually just gonna do a little shares outstanding calculation off to the right. Now, I don't really, I don't really ever care about authorized shares unless maybe I work in equity capital markets or I'm having a conversation with a client about, potentially issuing shares to raise capital. I almost never, ever look at that number.

The issued shares is gonna get me a little bit closer to what I need, because at least I know that those were in fact issued to raise capital.

So my shares outstanding calc. I'm just gonna, abbreviate that as so, because sometimes that's, we use these FDSO fully diluted shares outstanding.

So just a ni nice way to not have to type all that out.

I'm gonna take the 80,000 and then I'm gonna recognize of course, that at some point since those shares were issued, I bought back 20,000, which I'm holding, quote unquote, in treasury.

This is in effect negative capital. And, and it is even presented as such on a balance sheet, it's negative capital because it subtracts from the original capital that was issued under the issued category.

So I'm gonna take the 80 minus the 20, and that's gonna gimme 60,000.

Now it's throwing at 62 5 is a weighted share calculation.

I don't want that ever. Because I'm dealing with balance sheet stuff here.

I haven't been asked for earnings per share, so I don't, I don't want this 62 5.

It's, it's close to the 60. Easy to get confused, but we don't want it.

So I'm gonna take the 60,000 and I'm gonna multiply by the closing share price of six 50, and that's gonna give me the current equity value, also known as the market cap.

Okay? Any questions on that kind of basic stuff? Okay.

Now, in workout two, we have a slight complication. And the complication here is that, is that this company, like a lot of companies, has multiple classes of shares.

And you know, this is, this is very common. It happens for a variety of reasons in this situation here, what we're saying here is that the, the B shares, have these sort of super voting rights, and essentially, when the shares are, are purchased or sold, they would actually convert into the common A shares.

So this is when there's a group of perhaps managers or a founder that kind of wants to hang on to the voting stock, just to make sure that they don't ever kind of get forced out or forced into an acquisition or sale that they kind of don't, personally approve of this isFacebook has this a lot of companies do. So in this situation, we have essentially two different classes of stock, but they both have economic value in the sense that they have a claim on the, the underlying assets of the company.

And that's an important distinction because there are occasionally voting shares in a company that are held, which, which don't have any economic value.

They're just voting shares.

And that's a kind of more of a slightly more advanced thing. But I have seen it come up a lot. So I think it's, you know, kind of a good, you know, sort of question to ask if you're, if you're on the desk and you're working, and it's a good question to ask somebody, you know, an associate or senior analyst is do the B shares have an underlying economic value? And if they're trading or they have a share price, they do, sometimes they're actually linked to the same share price, which is the case in this example. So here we have two classes of shares and one share price. So the market cap here, I'll just actually copy this label in, save myself the embarrassment of my very bad public typer, you know, bad public modeler, bad public typer, I've just gotta come outta my shell, I guess. And I'm gonna take the sum of, let's see, there we go again, sum of the two shares outstanding times the share price, and that's going to give me the equity value.

Okay? So that kind of gives us a sense, you know, of, you know, that calculation, that calculation of what equity value is. Now, the next sort of step really is to understand when I am valuing a company's equity what am I valuing, right? What am I valuing that residual stake, that residual claim on the assets of the company? So, we think about that for a second.

We say, well, if valuing the equity of a company is, is kind of in effect done for us by the market, you know, what is the problem? Like, what is the real challenge? Well, obviously we need to make sure that the value of that equity is accurate, right? Is, I mean, the markets are efficient and we believe that. However, we have lots of different people, right? Lots of different, as I, on my first slide, lots of different kind of reasons for valuing a company.

So that equity value may or may not be the appropriate value for that purchaser, right? So that's one kind of reason.

So is that equity fairly valued in the market? So that's something that we're gonna have to kind of explore as we go through this. This valuation discussion over several weeks is that equity value as priced by the market, the right value? And then also kind of what is it worth to us the buyer or to another buyer if there's competition.

And so that's something that we're gonna have to explore as well. Now, it kind of raises an interesting question, because, you know, to buy a company, to buy a company out, right? We have to actually purchase the ownership of the company from the existing shareholders. So at the end of the day, to buy out a company, you have to buy out that equity. Now, what happens? Well, first of all, let's just, lemme just stick with that for a moment.

Lemme just stick with that for a moment. So I always go back, I go back to real estate a lot because I think about something that I think people can understand, sort of, even people who are quite probably young and early in their careers as you are, who haven't even maybe dabbled in the real estate market yet.

It's just sort of a very kind of tangible thing, because we see it every day. Um, now buying the equity of a company.

Now I've, we've already established that equity is that residual value. So, you know, if I'm looking at, let's just say here's company A and here's company B, company A, let's just pretend that they are the same company, essentially, right? It's like the same kind of same thing, more or less, same size, same earnings, all that kind of stuff. Company A has let's say a lot of debt and a very little bit of equity.

And then company B has, let's just say, a little bit of debt and a lot of equity, and we're basically saying that A and B are the same effective company.

Now, obviously, if we're buying the equity of company a, well, that equity claim has a very, very kind of low value because the equity of this company is underneath a ton of liabilities.

So if you buy out the owners of that company, you, you can go wave that deeded around and say, yeah, I bought this company, look at me, I'm the owner. But unfortunately, a lot of people kind of come ahead of you in terms of the value of that stake, and therefore the value of the equity of company A is, is impacted by that. Now, if I look at company B, company B on the other hand, has a lot fewer liabilities.

And so the equity stakeholders in company B actually can command a higher value, and that higher value is because there are fewer claims ahead of them. And, and so ultimately we have the same company, we just have different equity values.

And this is why it can become challenging to actually compare equity values or to even know whether the equity value that we're paying, you know if it's a meaningful number, if it actually, if it actually makes any sense because we haven't really considered these other factors. So now to put this into real estate I'm just gonna say like my wife and I, we have a house that we bought a couple of years ago. So, you know, we have a house that we bought and financed, under typical kind of real estate financing circumstances where you put down about 20% and you mortgage the rest, right? So we're kind of like house a, right? We're like company A.

Now my neighbor's house. Now they, they've been living here for like 15, 16 years. They've got a son that just went off to college and so they, in the course of that nearly 20 years of owning the house, whatever it was, they've been able to pay down a lot of the debt. Now, our houses are the same, actually the same house.

Now they're built in the same year. They're actually, not that this matters. They're once kind of part of the same parcel.

They split them up, they couldn't be more similar.

The lots are the same size, the bedrooms so from a real estate perspective, this is practically the same house, right? They even just renovated their kitchen just like we did.

So there's a lot of stuff going on here that make these houses very similar, right? If you're a real estate agent, you'd say, Hey, there's a good comp right now, if you were looking at buying the house, my house, or Tim and Heather's house, would you approach us and say, Hey, what's your equity stake in this house? How much of it do you own? I don't own very much of mine. The bank owns more of mine.

Tim and Heather, on the other hand, they do have more equity in the house, but I would push back and I would just say, so what you, so what you can, you, you, you can change that all you want.

The value of the house is still the same, we have the same exact house, right? So this kind of thing that I'm talking about here is the difference between equity value and what we call enterprise value, or, you know, asset value.

The value of the equity is one portion of the value of the whole thing. And so when we talk about, enterprise value what we do is we actually take that equity value that we just calculated the equity value, which is the market cap or market value, And we add to it the value of the debt, the value of the other stake or claim.

And together that gives us the value of the whole thing.

Now, I'm gonna refine this in a moment, but that is the basic premise or concept of what enterprise value is.

So what we're saying here is that the right side, again, is the funding, how I paid for it.

The left side is holding the value of what we use the funds for.

So the enterprise value is the place where we're gonna focus, you know, for a lot of this discussion, because it actually tells us where all the value of the enterprise or the company is, or the house is, the values on the right, the debt and the equity are gonna change, are depending on the company, depending on the buyer, depending on the situation, the market, et cetera.

So enterprise value is the value of the debt and the equity.

Now, I'm gonna refine this a tiny little bit because most companies, in addition to that we'll have sort of some kind of amount of sort of cash on hand, and that cash on hand is either potentially running the business, or it might be excess cash that's, that's just kind of kicking around and flowing and that the, and that's been flowing through the company that they've, they've decided to kind of hang on to. And so the way this definition is typically presented is that we take equity value, the market cap, plus the debt minus the cash.

Now, why would we do that? Well, I mean, if you think about it, I mean, realistically speaking, if you have cash on hand and you are liquidating a company, the first people that have to get paid off would be the debt holders, right? So if I had a little bit of cash here, the first thing that would happen is I'd have to take that cash and I'd have to pay down the first kind of claim holders, the first stakeholders in the deal.

And so that cash would get netted off of the debt.

So I was netting off the cash there.

And so we're back to effectively now kind of the same equation or the same depiction that we just had, which is again, the value of those kind of assets that, that make up the business equal to the value of the net debt, plus the market cap of the, of the equity. So that's kind of the definition for right now that we're gonna run with.

And I've used the term already, but I'll just kind of you know, I'll just kind of expand upon it, which is that this concept of, of stakeholder in a business.

Now stakeholders used a little bit differently these days particularly with the advent of ESG, and you know, there, there are stakeholders in the community and, and the environment and all that. But I'm talking about really more of the kinda the classic, you know, financial definition of stakeholder, which is essentially, again, who provided the funding for these assets that are, you know, in charge employed with creating the profits, the earnings, the cash flows of the business.

So let's take a look back at the exercises. Lemme see if there's any, any questions on that at this, at this point, I don't see any popping up.

So this looks like we're all on the same page.

I'm gonna take a pop back over to these workouts and let's take a look at workout four and see if we can figure out for work out for what the enterprise value is of this company.

So the first thing that I'm gonna do is, again I'm gonna start with the equity value because I can get that pretty easily, right? That'll change next week. But for right now the equity value is pretty easily established by the market.

So my equity value here is gonna be equal to my share price times my shares outstanding.

And now the next thing I have to do is calculate the value of the net debt.

So the net debt here is gonna be equal to the short-term debt, plus the long-term debt, minus my cash and minus my cash equivalence. So, you know, a lot of times companies won't necessarily have all of their cash exactly in cash. They'll have it in very liquid investments, like marketable securities might even be called short-term investments.

And we generally include this as cash, like something that could be very easily liquidated. In many cases, they're already marked to market because of the way the accounting works, right? And so that type of asset we're gonna assume is cash, like enough to net it, and that's gonna give me net debt of 25,768.0.

And so my enterprise value is going to be the equity value plus the net debt.

How's everybody feeling about that? Pretty, pretty easy, right? Nothing too complicated. Now, you know, you might act come back at me and just say, well, you know, I mean, I get the house example. You know, you've drawn kind of a very basic kind of balance sheet with your funding on one side and your resources on the other. I get that.

But in the real world, I mean, isn't this a lot more complicated? You know, isn't this isn't this effectively how would this look with a more realistic kind of balance sheet? Well, let me show you kind of how, how I got there, just kind of, so you can see that I'm not overlooking, you know, I'm not overlooking the fine print, so to speak.

The first thing I'm gonna do here is I just wanna sort of show graphically how we're gonna approach this. I'm gonna do this kind of in a balance sheet way. I've got my market cap here, and then I've got my debt here, and then I've got my cash here, and I've got my Assets here. Sorry, it should be ev here, ev or, you know, we could call it net asset value, but I'm gonna call it ev.

So effectively, we're to walk this bridge to equity value to enterprise value. We're adding up the stakeholders on the right, we're subtracting cash on the left, and we're arriving at enterprise value. Now, another way to look at this or think about this or title these boxes, I've used the term stakeholder already, so the stakeholders are on the right. And then, you know, cash, obviously it is cash.

We know what it is, but we also, you know, can think of cash as effectively being kind of a non-core asset because it's sort of the result, you know, of, of doing business, right? In other words, we raise cash through financing, right? Or we generate cash through running the business, and then we take it and we employ it in the business, and we employ it in the business by acquiring or developing, growing the core assets of the business.

So I'm gonna just put this term core in here because it's gonna help us as we make the link from today to next week with comparables when we make the link from the balance sheet to the earnings metrics and drivers that we're gonna, we're gonna pair with these equity value and enterprise value figures.

So we're trying to get at, you know, again, this core EV thing. So let, let me kind of expand upon this now for a moment and talk about, let's look at a kind of a, maybe a bigger, a more realistic balance sheet. Well, what does a realistic balance sheet look like? Well, on a realistic balance sheet we're gonna have some cash at the top. Let me just draw this this way.

We're gonna have some cash, and then we're also probably gonna have some what I would call operating working assets, inventory, accounts receivable, prepaids, things like that.

So I'm gonna call these operating working assets.

And then we're also gonna have, you know, kind of our fixed, maybe, and even our intangible assets.

So our property plant equipment or copyrights or patents, those are gonna be kind of below.

But this is sort of the longer term nuts and bolts of the business, whereas the operating working assets are the short term versions, the inventory, right? Accounts receivable, et cetera. So now if I were to go over to, you know, the balance sheet side, they would probably have some operating working liabilities. And again, let me just so I can get these boxes nice and neat.

They would probably have some operating working liabilities as well. Now, I'm, I'm showing that they have, you know, maybe more of one or the other, it doesn't really matter.

And then they've got some debt, and then they've got some equity here as well.

And I'm, I'm gonna use market values here. Okay? So this is a market value balance sheet. So what would we do here? Well, we would take this and we would just do the kind of netting thing.

I'm gonna net my operating working assets and my operating working liabilities, and I'm gonna combine them into one box.

I'm gonna call that operating working capital or net working capital networking investment. So I'm gonna put that here, and I'm gonna net these two are netting each other.

And then I'm gonna net my debt and my, or my cash from my debt.

And I'm effectively creating kind of a condensed balance sheet here for valuation purposes. That's gonna show that I've got a sliver on top for operating working capital.

And then I've got my long-term operating assets below that long-term operating assets below that. And they're funded by my net debt and my equity.

And so what I've effectively done is I've taken an actual balance sheet and I've converted it into a valuation balance sheet. So this is like an actual balance sheet, and then this would be a this would be a valuation balance sheet.

So this is still my ev and this is still, these are still my stakeholders, and I've got the same exact equation, right? So I'm just trying to break down in effect what's in the box on the left, because I think we can all sort of intuitively understand the funding side, how did I pay for this stuff? But I wanna make sure we understand what exactly is going into the valuation of the enterprise itself, right? From the left hand perspective, what's in that box? And what's in this box is restricted to just the operating assets of the company.

Current long-term does not matter. Does not matter.

So, um, let's take a look at, just see which problem is next while I'm fishing around for that.

Are there any questions on that particular concept? I want to talk about one more live example here.

Let's go over to Felix and let's take a look at, nice kind of simple company. Let's take, let's take a look at Lululemon.

Everyone knows Lulu and Lulu is kind of an interesting company in this regard.

Lulu's an interesting company because, um, they recently went public, you know, not, not too long ago, and they've got a very, they've got a very good, kind of business model, and they charge a lot for their products. It's kind of high margin business.

So, you know, they're generating a lot of earnings, a lot of cash flow.

If we look at Lululemon's enterprise value bridge, it's actually kind of interesting because they don't, they don't have any debt, right? They don't have any obligations to anyone other than the equity holders.

So the equity holders for Lululemon are in effect, the only kind of, people in that right hand side. Now, interestingly, if we go down and look at Lulu's Enterprise value, the enterprise value for Lululemon is actually lower than the equity value.

The enterprise value is actually lower than the, than the equity value.

And that at first glance looks kind of strange because we know the formula is equity, you know, plus debt equals ev Well, if there's no debt if there's no debt, we don't owe anything. How does EV in effect go down? How does enterprise value go down? Well, the, the key to, to this is understanding, again, how this cash or, or kind of non-core asset works in this situation. So let's take a look at Lulu kind of graphically here.

Let's, it's all one word, I believe, Lululemon.

So with Lululemon, we've established that they have a market cap of, uh, 48 billion. So I'm actually just gonna start with the right hand side.

The market cap of Lulu is 48 billion now.

So this is in my formula, is gonna be my equity right now. They don't own any debt, but they do on their balance sheet, have about a billion of cash.

So again, what this is saying is that through the course of their business and how they've generated earnings, they've got an excess chunk of cash in the business that's on the balance sheet. Now, if it's on the balance sheet, it has to be funded, it has to have been paid for. You can't have a balance sheet that is, you know, equal except for the cash. The cash can't be hanging out on top.

It's gotta be completely funded, right? So somebody is paying or paid for, or is responsible for putting that cash on the books. And in this case, what we see here is that the EV or the net asset value of the company is going to be worth 1 billion less than the equity value.

And from a formulaic perspective, the reason why that is, is if you take the 48 billion and then you add the zero of debt, and then you subtract the 1 billion of cash, then you're effectively subtracting the cash from the equity value to get the ev.

We're saying that this company has kind of negative one net debt.

Now, why does that make sense? Well, again, let's liquidate this company right now.

Let's completely liquidate it. Well, what happens is, is that if the value of this company is $47 billion, including the cash, who gets the cash? Well, the cash flows to the residual stakeholder.

If it hits any debt along the way, it gets picked off by the creditors.

There are no creditors. So the cash flows right to the equity holders, the equity holders get whatever's left.

So they're gonna take that 1 billion of cash and run with it effectively at the end. Because it's theirs. There's nobody else that has a claim on it. This is the 47, this is the one, and that's the 48. Now, why is this important? Well, it's, it's important because, um, we're gonna start sort of expanding our understanding of enterprise value and start, you know, getting kind of more realistic with, with some of the other kinds of accounts that are gonna come up a lot on on the balance sheet. Now I tried to draw kind of a more, you know, realistic balance sheet here that had some other kinds of assets, right? Because everyone's got them, right? But we're also going to start to, you know, uncover, some additional kinds of accounts that we have to deal with, right? Because obviously if it were this easy you wouldn't be paying bankers, you know the money that you do to, to sort this out, right? So what I'd like to do before we go to the next problem is start to sort of think about this bridge and some of the other complications that can be there. The first complication that I would like to raise is, I have described a company here, both in talking about Lulu, and in talking about my kind of made up companies here, I've described companies that, that kind of only have core assets and cash only have core assets and cash.

So what about companies that have other assets that are not part of the core business? Now, what am I talking about here, right? Who would just have kind of random assets that aren't part of running the business? Well, we talked about a couple of weeks ago, we talked about the kind of different ways that you can buy companies, right? We talked about, the three methods I should have pulled that page in.

But there were, there were three different ways to buy companies, right? You could, you could buy kind an investment, which would be less than 20%.

And that's typically what we might call, you know, a marketable security or an, a security held for sale, available for sale security, right? You could also buy what we called an equity method investment, or sometimes it's called an associate or or just an equity investment.

And that was something that was between 20 and 50%, something that's between 20 and 50%.

And then lastly, I brought up this other, uh, uh, situation where you buy 50% or more of a company and then you have what you, what you would call a full consolidation, which is acquiring 50% or more. And in that case, we don't really see on the financial statements, that company as a line item, it becomes entwined in the accounts, right? So all the accounts, are all really, all of the accounts, all I'll call them net assets. Because you know, obviously the equity goes away. We talked about that all of the accounts, the net assets of the acquired company are consolidated to the parent.

So they're just there, right? So when we're looking at, you know, we're looking at Lulu doesn't they, they did have an acquisition, I think they wrote down, but we look at Intel, anybody that Intel has bought out on that level where they've acquired full control they're just, buried in here, right? In the balance sheet.

We're not gonna see them.

We're not gonna see them. They're just kind of, they're all just in, in inter intermingled here. Now, that kind of investment or that kind of acquisition, I should say is sort of not a problem because it's in the balance sheet already, right? It's sort of the value is sort of in the balance sheet.

The equity method investment and the investment do pose a problem for us. Now, they're also on the balance sheet, right? They're on the balance sheet as line items. I think if we, I think if we look over at I believe Under Armour still has equity methods investments broken out on their balance sheet.

They might have been buried in somewhere. I think they are, Coke does, lemme go to KKO, right? Go to Coke, go to their balance sheet. Yeah, they've got equity method investments kind of, you know, spelled out for us, kind of nicely right there.

So I think we looked at Coke when we did this a few weeks ago.

What did Coke buy? Well, like a lot of beverage companies, they buy, you know, sort of like dip their toe in the water stakes in companies that they're considering perhaps fully acquiring in this, you know, category three here, right? So in the case of Coca-Cola, I dunno if anybody remembers, they have a 20% stake, I believe in, in a company called Monster Beverage.

Monster Beverage actually started as a soft drink company in southern California. It developed an energy drink. And in order to be acquired by Coke, it actually split off the beverages, the soft drink beverages from the energy, because Coke, you know, would've hit antitrust, you know, if it, so Coke bought this steak in Monster and Monster's kind of sitting on the books now, Coke's in the beverage business, monster's in the beverage business. So, you know, kind of what's, you know, what's the issue here? Well, the issue here is that, you know, again, where we're ultimately going with this is that we need to be able to determine, right, what we need to be able to determine if the equity value, that residual stake here, this market cap Is the value that we want to pay for this company, or is it should we pay more or should we pay less? So what we're gonna do is we're ultimately going to compare Coca-Cola with several other beverage companies.

We would do the same thing for Lululemon. We would do the same thing for Intel.

We would do the same thing for you name a company, right? We would compare that equity value to other companies and figure out how it, how this company is valued relative to others, right? This is the work of next week.

But again, if I'm just using this sort of simple formula, right, of debt plus equity equals ev, I have to acknowledge that Koch has put a significant amount of resources into buying these other kinds of assets, buying soft, this, this other energy beverage. They, they think that energy beverage is the way to go. Now, if I go to Keurig, Dr. Pepper, Keurig, Dr. Pepper has the same thing. They have a couple of little energy drinks, they have a big stake in a startup, non-alcoholic beverage company called Athletic.

So they have kind of a different idea about where they think the, where they think their niche in the market's gonna be. They're, you know, Coke is gonna have, be perhaps gonna have a stake in monster at some point, a larger stake in Monster Keurig. Dr. Pepper sees the non-alcoholic sector. So what we're starting to see is that, you know, there's a, there's some kind of stuff here that we, that we can't really equate.

Not in terms of dollar amount and not in terms of strategy. A third company, whoever that company might be, could be Pepsi, could be another beverage company from another country. They might, they may not have any equity stakes.

And so what we're seeing here is that it's hard for us to control for value if we don't acknowledge that these kinds of investments, right, which are partial investments, right? They're not controlling stakes.

These partial kind of investments are muddying the waters a little bit because we can't, you know, we just can't assume that everyone's got them.

And we certainly can't assume that everyone's got them on the same level.

So the next step in this enterprise value bridge is to adjust for non-core assets.

And the way we're thinking about non-core assets here is we're thinking about them.

That they are assets that the company does not fully control that, that therefore they don't have the ability to manage the operations, to make decisions on how the earnings are coming in. They only, they have 20%. Now, they probably have some input with Monster.

They're probably advising them. They're probably maybe even helping them with distribution and whatnot. Hey, we're gonna send some Coke trucks your way, throw some cases on there. We'll get them out, we'll get them to the stores, right? They are, they are helping, but this is not the same thing. It's running the business, right? So we have to adjust for non-core assets. Now, the way this is gonna work is, again, we're gonna start with the equity value, and then we are once again going to add the debt.

And then as we switch over to the left-hand side of the balance sheet, we're going to start dealing with these non-core assets.

The first thing we're gonna do is we're gonna subtract out any investments that are considered to be non-core. Now, most things in this category of investment will be considered non-core.

There is a little bit of, you know, discrepancy among the few places that I've taught, the many places that I've taught at this point on, on Wall Street, but I know a few of them have some discrepancies in how they handle these.

Sometimes if the business is kind of the same business or same business line, sometimes they don't consider that an investment.

They do consider it kind of core. It that's kind of philosophical.

You're gonna have to kind of handle that more internally.

But in general, theoretically speaking, we want to take out these investments here as non-core.

Now, again, why are we taking them out? Why is it a subtraction here to get to enterprise value? Why is enterprise value not include them? Well, first of all, we have to understand that when we're working from market cap, when we're working from the value of the equity, the residual claim, that includes everything. So when you buy a share of Coca-Cola, you get a share as well in their investment monster, right? When you buy Keurig, Dr. Pepper, you get a steak in an athletic, and whatever else they own.

So the equity investor doesn't care at all. Core non-core, I don't care. I don't care where it is, what it is, I get a, as long as it's on the balance sheet, I get a piece of it on a residual basis.

So the share price of Coke includes a share, so to speak, of Monster, right? A piece of monster.

So if I want to get to enterprise value, which is unaffected by those things, and I'm starting with equity value, I gotta get it out.

So I'm taking out my investments, I'm taking out my cash, which is effectively being netted from debt, but I'm saying I'm taking it out, and then that's gonna give me my enterprise value, okay? So that's kind of the first complication from that section we did a few weeks ago.

And it may, it seemed funny at the time that we were going to, that we were jumping to such kind of a, you know, an out of place topic.

But, but it almost always, if we don't cover that stuff, then, then it always comes back to bite you now, right? So for the anyone in this class, in this group that missed that section on, on full consolidation in NCI, I would encourage you to go back and you could listen to this recording from that week, or of course, you know, we, we can pop into that section here, which is on the 18th of October, and we've got the Felix playlist there as well. Now, that playlist isn't gonna talk as much about the equity method investments and the investments that I'm talking about now. I wish it did. In fact, I have to maybe speak to somebody about adding that playlist there for everyone.

Because I could kind of see down the road a little bit.

So I covered these kind of not fully consolidated investments for that purpose, but I definitely have them in the notes.

So if you wanna go back and get the notes from session four, they're in there as well. Okay.

So also covered that week was this concept of a non-con controlling interest. Now, Coke's got one non-con controlling interest Intel as well, had one go over back to Intel. They had, a non-controlling stake as well. So, moments ago, I'm talking about, I thought Intel had one. Oh, yeah, they do. Yeah, big one, Moments ago, I'm talking about, hey, we're buying a stake in Monster, but we don't control Monster. We just sort of, you know, so am I talking again? Am I talking about these things? No, not this non-controlling stake really, again, means something else, right? It means just there's a quick refresher, I'm sure we ran outta time on this. A non-controlling stake implies that we have bought at some point in our, in our company history, a controlling stake in a company and fully consolidated that company into our books.

So the way it works from kind of a legal perspective or from a corporate structure perspective, is you've got company A, which is the parent, and then company A has some subs down below. And these subs, even after we do legally consolidate, fully consolidated, they still will actually operate as subsidiaries. I mean, they're, they don't really kind of go away because that's, I mean, that makes the most sense, right? I mean, you've got a company you buy, you're a company, you buy another company. That company runs as a company, you can't smash it to bits. I mean, sometimes it does happen, but usually you want that company to continue running, it's just gonna have controls on it that are pushed down from the parent, and obviously all of the, everything flows back up and whatnot.

So we have this structure where Company A was able to acquire a hundred percent of company B and C, but when it acquired Company D, it only got 80%. Now, from the accountant's perspective and from the law, a legal perspective, we had to put 100% of all of these assets and liabilities fully consolidated at 100%.

So all of their accounts receivable, all of their inventory, all of their property plant equipment, all of their working liabilities, all of their debt, if we acquired that and didn't pay it off or whatever, that's gonna all flow up their, all of it, all of it.

But in the case of company D, we actually only paid for 80% of it.

So what basically what I'm saying here is that if I were to kind of draw out what happened is we took 100% of company D onto our books, but we only paid for 80%.

So there's a kind of a, an accountant's nightmare here on the right, which is a funding thing.

So someone would be screaming, well, where's the other 20? It's like, well, we, we really didn't buy the other 20.

The law is making us put a hundred on the books, because that's full consolidation. So, well, you, well, you know, somebody had to pay for the other 20 of net assets, somebody had to pay for them. That's exactly right.

The original shareholders who did not sell, still own those 20 of assets.

So this 20 becomes the non-con controlling interest.

So these are shareholders that are outside of the existing shareholder group that, that owns. A, so here are these shareholders, shareholders, and then these are these shareholders. They're somewhere else, not the same.

And that's what a non-controlling interest is.

It means that somebody else owns a piece of your balance sheet outside of the company with no control. Now, just to clarify, just to make sure we're all on the same page.

If I bought 20% of Apple's stock today, I am not an NCI to Apple.

I am just a minority shareholder. I have a claim on the company, it means that I don't control it, they might have to give me a board seat or something.

I can make some noise, but I'm part of the shareholder group of Apple.

I am one of Apple's shareholders.

These people down here on the lower right, they're not part of the shareholder group of company A, they're somewhere else. They just own a stake of that subsidiary.

So let's take this, and let's apply this to the enterprise value problem or challenge.

What I just described is that all of subsidiary, B, C, and D along with company A is in this ev all of it's in there.

If all of those assets are included in my ev and, and they are by, by nature because they're, they're intertwined, they're enmeshed, then I must acknowledge in my enterprise value bridge that there is another stakeholder, another claim on the enterprise.

And so in this, well, I should, I should have done it on the other, lemme copy this and just do it on the, where'd it go? Hey, don't go away.

Yeah, I've gotta acknowledge that there's another claim on these assets in that claim or that stake is the NCI.

So again, just looking at this purely from a funding perspective, right? A funding perspective. I funded the company, I funded the operating assets of the company, the core operating assets of the company with equity. I funded it with debt.

And I've also got some funding from these outside investors, and they all contribute to what's in this EV box, right? They all contribute to what's in there.

And I'm still, I'm still gonna continue to back out the non-core stuff. It's all, you know, that's, none of that has changed.

I'm just dealing with effectively now another stakeholder on the right hand side. So if I go over to to Intel we can see now Intel's also you can ignore this pension liability if, if you would for a moment just ignore it. We're not gonna cover, pensions or they're kind of, they're kind of going away anyway on their own.

But just ignore that for, for a moment.

If we look at this handy tool on Felix on how to get to the enterprise value for Intel, what we see here is we've got the 158,654 of market cap.

We're gonna add to that. Actually, what I'm gonna do here, I'm just gonna copy this great feature in Felix, is to copy this bridge. Let's go over to, add another sheet here.

Put this in.

Nope, didn't wanna do that.

And let's just see what's happening here.

I've got my fully diluted market cap, that's the 158,654.

I'm going to add the value of the business that has been contributed by outside shareholders.

I'm going to add the debt and equivalence from their current balance sheet. I'm gonna ignore this for right now.

I'm going to subtract the investments because these are non-core assets, or cash-like assets. You wanna view 'em as cash-Like, that's fine too.

If you want to just say, you know, Hey, at the end of the day, I could just sell off all these random investment stock bonds, less than 50% stakes, less than 20% stakes, whatever. They just sell them off, pay down debt. And then I'm, I'm home free. You could do that, it kinda works the same way, right? Subtract the cash, subtract the investments, and that's going to equal the enterprise value.

So this has been copied in without a formula, but I can get to, um, this 186,909 by doing just that. Now, I'm gonna have a hit a little bit of static here because of this pension.

And what I'll say about that really quickly, just so I can do the math and not get the, the right answer is that basically what we've acknowledged here is that we've made some promises to employees to pay for their pension benefits, but we haven't fully set the money aside for them.

And so because of that, legally it's a liability that is of, of really very, very kind of supreme importance.

It comes even before the debt has to get paid.

You have to make the pension whole.

You could never liquidate this company without making the pension whole at the very, very top of that list. So because of that, they are a liability that has a claim on the assets.

So we would in theory, also add, add that pension claim. Now, I'm not gonna tell you how to find it, get it, calculate it, et cetera. We're not gonna do any of that, but I'm just telling you for purposes right now, that's what that is.

So if I were to go in here and take the market cap, add the NCI, oh, take the market cap, add the NCI, add the debt and equivalents, add the pension liability, subtract the investments, and subtract the cash cash, I get to the 186,909.1.

And that is effectively the enterprise value bridge.

So if I go back to my slide here we can see that that's what we're depicting here is that process.

Now, I wanna do a couple of problems. Well, let's just do one now so I can stop. Well, I have to keep talking to do the problem, but I can stop kind of explaining and maybe just kind of go into the mechanics. So workout five says, use the following information about Kilo PLC.

I don't know where they got that name from, but interesting one to calculate the enterprise value. So here we have just the problem with just the investments issue, right? So that's just like the one above. I think that's why I didn't highlight it.

Because we kind of did that one above. We've already got the investment.

Let's skip to six. I also probably didn't like the name Curracloe, so I just decided I'm not gonna do that one. Let's go, let's skip to six.

I like the name Balinesker a lot more.

Balinesker is a much better name. Am I saying that right? Yolanda? Do you think Balinesker maybe it's Balinesker.

I have no idea how to put a British spin on that.

I miss all the Italian names from the consolidated workout.

The other, those are easier for me. Okay, so here we go.

We're gonna do the equity value that's always, again, for public company, pretty easy.

And now I'm going to walk that bridge from equity value to enterprise value.

So I'm gonna add my non-controlling interests. I'm gonna add my short-term debt.

I'm gonna add my long-term debt, and I'm going to subtract the cash and cash equivalents, and I'm gonna subtract the non-core assets.

And if I do that, I should get to the right answer. So I'll start with my equity value, and I'll add NCI add short-term debt, add long-term debt, subtract and subtract.

And that gets me to 292,172.

I'll put my formula out here. Now, one question you might have, you might be too shy to ask.

So I'm gonna ask it for you, since I'm already doing all the talking. I'm gonna, and I'm also gonna add question asker to my portfolio here.

In fact, maybe I'll even ask you, Yolanda, I'm not putting Yolanda on the spot, but I know she knows this.

So I've said that the valuation is a balance sheet problem, that we've gotta take a balance sheet that's in, that's in book value, and I've gotta get it to market value.

So obviously I started very, very kind of with the low hanging fruit of getting the market value of the equity.

I keep talking about debt, but I'm not mentioning market value of debt.

So, Yolanda, should I be talking about the market value of debt? For what purpose? For in order, in order to get, to get the balance, to get the balance sheet into market value, to get the, the correct ev Yeah. To, yes. So to get the balance sheet into market, or yes. Yeah.

Yes, exactly.

So I kind of have somewhat purposefully overlooked, or at least not mentioned, that if I'm taking the market value of the equity, I also need to take the market value of the debt. Now, most people don't think of debt is having a market value.

And the reason why they don't is because, well, look, if I borrow a billion bucks, I gotta pay a billion bucks back.

Now I am paying interest, but interest is an expense that's a usage fee.

It's not that I'm not paying that back at the end. In most cases, the principle of the loan is kind of the principle of the loan, right? So the, the market value of the debt is actually something that's very, very, very critical, particularly right now.

And the reason why it's very critical right now is because, we're in a

period of very kind of high interest rates relative to the past.

And what that means is that for any company that has borrowed at lower interest rates, the value of that debt to an investor is lower, right? So think about it.

I mean, if you let, we'll put it in, in terms of bonds, because this is really what I'm getting at here, right? If you issue bonds at 5% par value of a hundred, so I'll just write this down. Issue bonds Par value, 105% coupon today, tomorrow, interest rates rise to 6%.

As an investor, your value in the 5% bond has dropped because, and any other investor, when you go to sell that bond, they're gonna say, why, why would I take your bond at 5% for 10 years when I can go buy the bonds being issued today for 6%? I'm, I'm leaving yield on the table by buying your bond.

So the bond holder that wants to sell the bond is, is going to effectively offer that potential buyer a lower price, and they're gonna say, I'll give you the bonds for 98, pay me 98 for my bonds. And then when you get paid back by the issuer in, you know, a little over nine years or whatever it is, you're gonna get a hundred plus all the interest that you got along the way.

So you get the 5% of the interest that I can't change, it's in the documentation that rate is fixed.

But by offering you this two discount, $2 discount, you're gonna get that $2 plus all the interest, and that's gonna equate to roughly the 6% that you can get today. Now, I'd made those numbers up, so I don't really know, but that, if, that is the math of it, and the math is very easy to do.

The bond buyer says, sold, I'll take those bonds at 98.

And now he's got, he has an equivalent or she has an equivalent yield to maturity.

So why am I going off into bond math here on the equity value bridge? Because as I said, I, I do a lot of work with ongoing analysts and associates as they run into problems. And one of the valuation problems that's coming up today is many people are overlooking the market value of debt.

And right now it's a big deal because again, if a company, and I'll just take a, let's take a quick peek, you know, I know that Home Depot, if I showed you Home Depot, if I showed you their bond, their debt section on their 10k, supplemental data, and then I want to go to the debt and derivative instruments. If we go to their, this is the long-term debt that Home Depot has. Look at all these bonds.

Whoa, Nelly, right? So this is the way that they finance themselves. They had this kind of rolling maturity of debt of bonds.

So now I only have the due date here. I don't have, when they were actually issued. And they have 10 year bonds, they have 20 year bonds, they have 30 year bonds. So there's like kind of a, a lot to sort through here. You'd have to actually probably go by, you have to go maybe to Bloomberg and, and look these up one by one.

And there was a time when someone like Yolanda or myself would have to stand at a Bloomberg terminal and one by one go by each issuance to figure out what the market value of this issuance is.

So the principal amount in each of these cases, these 2023 bonds that are coming due, well these were, this is, I pulled up the 10 K. So some of these have already been paid off.

So the bonds due February, 2024, that might be a 10 year bond. That means it was, it was, it was issued when interest rates were what they were in 2014, which is lower than they are now.

So that means that the price of that bond is probably low or lower than par value. So that, um, you know, that 1100 here, is actually not 1100.

It might be 900 or 10, 10 50.

You'd have to do that for all of these to figure out what the market value of this debt is. 'cause this market value is different than this.

If you bought Home Depot today, how would that work? Well, you would have to most likely pay off all of this debt, most likely because Home Depot as a company doesn't exist anymore.

You can't have a bond that's, that's backed by terms of a company that doesn't exist anymore, right? So that's gotta get paid off.

And if, and if an investor's gonna get paid off, they're gonna get paid off at the value of that instrument.

Now, it's possible there'd be some penalties and stuff on there too, and prepayments and whatnot 'cause it's not easy to just pay off a bond.

But the point is, is that the market value of the debt right now is very important to consider. Okay? So let's take a a look at a couple of more problems here.

Workout number seven.

Workout number seven. Now, here we're kind of flipping things around a little bit and we're saying that we actually know the enterprise value, we know the enterprise value, and we want to actually find the equity value. Now, in some ways, this is I mean, it sounds like we're making it hard just to make it hard, right? Just to say like well we're changing the formula up on you just to see if you can go backwards to forwards, right? But it's actually in many ways, in valuation more common to know the enterprise value and to have to solve for the equity value.

Because think about it, I want to value company A and I've got, as comparables, let's say, companies B, C, D and E, I wanna see whether company A, is equity value is overvalued or undervalued in the market relative to companies, B, C, D, et cetera. Now, that's gonna be, that's the work of next week.

But obviously I am in that situation.

I'm solving for equity value. I don't want the market cap.

I don't wanna know what the market says company A is worth.

I want to actually use the competitors' values, the comparables values to figure out what I should be paying for company A. And again, this is why it's so important that we do all this work that's on this bridge to get, you know, to get the stakeholder claims in and to get out, you know, to get out the non-core and the, and the et cetera.

So in this problem, we have an enterprise value. Now, how did we get that enterprise value? Well, we got the enterprise value in this case by doing a discounted cash flow analysis.

Now we're gonna do that in a, in like two or three weeks.

So if you, if you haven't done one, don't worry.

It's just the type of valuation analysis that, that effectively brings us a value for the enterprise, for the value of the assets themselves, the net assets themselves, which is what a comparables analysis does too.

And we'll do that next week for sure. We will, we will use these comparable companies and we will find an enterprise value, and then we'll work our way back to figuring out what the equity value is. Because at the end of the day, we have to make an offer to the shareholders. You, you can't just kind of go out there with an ev, Hey, I got your EV be like, how much do I have to pay these people to go away? That's, that's what I need to know. That's the equity value.

So we have to be able to walk that bridge both ways. And to walk the enterprise value to the equity value, we are going to go the, we're gonna do everything kind of the opposite.

So I'll take this again and I'll just copy it down here.

Oh, something didn't happen there.

Take my, I'm gonna call this equity value to enterprise value, no, sorry, enterprise value to equity value.

And now again, we've got the, we have got the ev which in this case we, we've said could come from ADCF or it could come from comps.

And this problem came from ADCF.

So how do I figure out what to give to the shareholders? I know what the value of the company is.

How do I know what to give to the shareholders? Well, now I'm gonna do everything in reverse.

I'm gonna add my cash, I'm gonna add the value of the investments. Why? 'cause I'm working toward equity value. Equity value wants all of this stuff.

It wants the excess cash, it wants the value of the investments, but at the same time, it does not get paid before the debt.

So we have to back out the debt.

And it does not get paid before those outside shareholders.

It's a residual stake. So all this stuff comes first.

And so my equity value is the residual.

So in this problem, I've got my enterprise value. I'm going to subtract my NCI, I'm gonna subtract my debt.

I'm gonna subtract short-term and long-term debt.

I'm going to add my cash, I'm gonna add my non-core assets.

And then lastly, I gotta divide that equity value by the shares to get to my per share amount. Because this is what they're asking me for my implied share price. Okay? So I'll take my EV minus the sum of these three, add the sum of these two, and that gets me to 2,343,421. And now per share, I'm gonna take that and divide it by shares. Outstanding.

And there you go.

And we're calling this the implied price because what this is telling us, Almost with a hundred percent certainty is that this is not the share price in the market. The share price in the market maybe was, you know, 1550 or something, I don't know.

And I did ADCF, I made some assumptions. I did ADCF, and I came up with an enterprise value. And now I want to figure out, you know, if the share price derived from IDCF, how that compares to the share price derived taken from the market.

And that's why we're calling this an implied share price.

I want to just I see in the next problem, which I didn't, I didn't highlight to do, we just have a few minutes left and, and you know, kind of been able to cover almost everything that I wanted to cover. There's a lot of problems in here that actually really deal more with what we're gonna do next week. So as I was looking at them, I was like I think I want to, I wanna kinda leave these, I may actually even pick this particular exercise up again next week. Just, I feel like it fits a lot more better, into next week. But there's also a lot to cover next week too.

But one other thing that we have to think about there, there, you know, there are a few other stakes that we, that often come up on the, you know, on the balance sheet that we have to deal with. I've really got kind of most of them here.

I don't know what, I don't know what I just did, but let me just see this, this, it's gonna move this up a tiny bit.

And another claim that you might see here is peers preferred stock preference shares would be, would be another claim on the company, another form of capital that's raised, to run the business, but still has to get kind of taken care of first.

We also saw by the way the pension claim as well, you know, I could put kind of, another pension might be in there as well, but that's kind of the big one, right? So let's actually just to tee up next week, just to get you kind of, you know, excited to come back for next week.

Let's take a look at, this next problem, which is that I wanted to do. Just skip ahead. Lemme do actually, lemme first, lemme, are there any questions on this whatsoever? Did anybody have any questions on equity value, enterprise value, anything that's on the bridge? Well, I do have a chunk of time to answer, expand upon an answer.

Okay.

Yolanda, I think I'm gonna do this problem next week.

I don't wanna rush it and I just feel like, well, oh, here we go, Garcia. Yes, Luis, can you explain how to adjust for normalized, uh, working capital in the bridge, normalized working capital? So I assume Luis, what you're talking about here is that if, for example,

there are any kind of abnormalities in, in the, in the most recent balance sheet, if there are any abnormalities, and if there are any kind of, you know, sort of unusual trends or perhaps an inventory that's, that's out kind of out of line with kind of a traditional a traditional trend in that account, if you would adjust for that I could, can I assume that that is what you're asking? I think you could probably just type it in as another question, right? And another, another one too about NCI and EMI. So I will take time to do both of these. So when we're doing evaluation, Luis, obviously we want normalized earnings and we want to have a normalized appropriately valued balance sheet. So if there are working capital adjustments, it would be important to make them.

I will say that in general, those kinds of adjustments are done, probably at a different stage of the valuation.

What we're setting up right now is the process of, first doing your comparables, then doing ADCF, then doing other forms of valuation, maybe transaction comp and, and kind of trying to get to sort of an idea of where this stock is trading relative to others. Now, when it actually comes time to, you know, to do the next level of due diligence, that is when we would start to make the adjustments for things like overvalued assets and undervalued assets.

It's very difficult at this stage, particularly because you're gonna be doing this for eight or 10 companies to, to have that information as to what, what specific assets or liabilities and the balance sheet are overvalued or undervalued. But eventually they will be brought back to, to fair market value. Now, I did get another question here about explaining the difference between NCI and equity method investment. So equity method investment is an asset, right? It's an asset that the company has decided to place an investment with another company.

And they are buying the outstanding shares that are trading in the market, or if it's a private company that already exists and they're buying a piece of that. So again, it's just like me buying Apple Coke bought Monster Monster's a public company too. They just bought outstanding shares. They are now a shareholder of Monster publicly traded.

So there's nothing really kind of funky going on there. It's just one company owning another, a piece of another company, but it's considered below the level needed for control. Now, the NCI again, is entirely different because it's when, company A has bought company B, or in this case, company D didn't get all of it 'cause some shareholders held out.

Now public company shareholders cannot hold out, but private company shareholders, families don't have to sell. They could, they can retain a little bit if they don't want to sell, and you can't really squeeze them out the way you can with a public company.

So they may hold onto that, but again, they're outside of the company.

They never owned stock in company A and company A has nothing to do with them. They didn't, they didn't buy their stock. So these shareholders, which again, are the ones in this lower right hand corner, these shareholders are outside of the company.

They're not owners of the common stock of company A, but they do represent a piece of, of ownership of the assets that got consolidated fully into a, so they basically can say, I own these shareholders own 20% of those assets.

Company A does not own those assets.

So it's kind of a liability in a sense. It's another claim.

So that brings us to the top of the hour. I hope that got it there for that guest. If not, please feel free to message me. And I'm going to do as I normally do, I'm gonna post these notes. I'm gonna post my solution. I'll post the formal solution and and we'll be in good shape to take on comparables, trading comps next, next Wednesday.

Thank you all for coming. Thank you Yolanda And I'll see you on Felix live next, uh, next Wednesday.

Have a good week, everyone.

Bye. Thank you all. Thank you.

Appreciate the comments.