Question

When you're looking at an industry-specific multiple like EV / Scientists or EV / Subscribers, why do you use Enterprise Value rather than Equity Value?

a) Equity Value accounts for all liabilities
b) Equity Value doesn't consider cash and debt
c) Equity Value includes minority interests
d) Equity Value incorporates preferred shares

Answer 1

EV is used instead of Equity Value in industry-specific multiples because EV accounts for cash and debt, providing a more accurate valuation of a company. The correct option is b) Equity Value doesn't consider cash and debt

Step-by-step explanation:

When using industry-specific multiples like EV / Scientists or EV / Subscribers, Enterprise Value (EV) is preferred over Equity Value (EV) because:

b) Equity Value doesn't consider cash and debt

Enterprise Value (EV) includes the market value of the firm's equity (Equity Value) plus the value of debt and other liabilities minus cash and cash equivalents. By incorporating debt and cash, Enterprise Value provides a more comprehensive assessment of a company's total value or worth from both equity and debt holders' perspectives.

Equity Value, on the other hand, only considers the market value of the firm's equity (common and preferred shares) without accounting for debt, cash, or other liabilities. Therefore, when evaluating industry-specific multiples that involve factors such as the number of scientists or subscribers, Enterprise Value (EV) is preferred as it accounts for the company's capital structure by considering both equity and debt, offering a more holistic view of the company's valuation relative to industry-specific metrics.