This CFA Brainteaser covers aspects of Corporate Finance and Equity.
Two of your colleagues are arguing about Enterprise and Equity Value. One colleague makes the following statement:
“The Enterprise Value of a company is always greater than the Equity Value.”
Is this statement True or False? Prove it.
Can you express Enterprise Value in terms of Equity Value plus other components?
Remember that the Enterprise Value (“EV”) equals Equity Value (“P”) plus all debt-like obligations (“D”) of the firm (borrowings, pension liabilities, deferred consideration etc.), less cash & cash equivalents (“C”).
Simplified this means:
To prove or disprove the statement, we need to understand whether it is possible that:
Which can be rewritten using (1):
Which is simply equal to (subtracting P and adding C to both sides):
This means that for a company that has cash & cash equivalents larger than debt-like obligations, Equity Value will be greater than Enterprise Value.
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