Excellent video Brian, Makes me wonder are if all those extra hours and effort put into building complex PPE and Debt schedules worth it , given their low impact on the EV ?
The short answer is no, but bankers love to do pointless work. Complex models are rarely "worth it," but sometimes people like to talk themselves into believing they are.
Thanks a lot. Aren't you double counting the last year contribution when in the DCF calculation, you count that year's FCF in the "(+) Sum of PV of Free Cash Flows" part and also count that year's Ebitda in the "Baseline Terminal Value" part?
No. The Terminal Value represents the PV of the company's cash flows from the end of Year 14 or beginning of Year 15 onward. The multiple is what someone else is willing to pay for the company at that stage for the company's cash flows starting at the beginning of Year 15.
Thank you for the great video! I just have one quick question. If an interview question is: you spend $1000 to build a new factory (capex), then how does it affect EV. Does it stay the same or increase? If so, by how much?
@@financialmodeling But wouldn't an investment in PP&E (CAPEX) decrease my FCF and that decrease would reduce my Enterprise value? If I do think about this scenario as in your answer, I do understand it but if I think about it in a more "formula way" I do not understand it. I mean, Capex would be an investing activity and reduce my FCF (and so my enterprise value). Where is my mistake? Hope you can help me! Thx
@@undercover1923 Your thinking is incomplete. Yes, extra CapEx reduces UFCF in the short-term, but that investment will increase revenue and cash flow over the long-term, presumably by more than the upfront investment amount. You have to think about the whole cycle of an investment or spending process and the after-effects.
Always high quality stuff here, thanks a lot, Brian! So, the Enterprise Value is equal to the present value of the future unlevered FCFs. Is the Equity Value then equal to the present value of the future Net Income or dividends?
Equity Value is equal to the Present Value of Levered FCFs (so neither Net Income nor Dividends, as you must also factor in CapEx, Working Capital, non-cash add-backs, etc.). The main difference is that you also include the interest expense and mandatory debt principal repayments.
![Equity Value and Enterprise Value Interview Questions: What to Expect [REVISED]](http://i.ytimg.com/vi/21BE38E3zu8/mqdefault.jpg)
Once again, a great video. Amazing source of information, thanks a lot M&I !!
Thanks for watching!
Thank you for this video. This is the most fascinating topic in the company valuation to me.
Thanks for watching
Excellent video Brian, Makes me wonder are if all those extra hours and effort put into building complex PPE and Debt schedules worth it , given their low impact on the EV ?
The short answer is no, but bankers love to do pointless work. Complex models are rarely "worth it," but sometimes people like to talk themselves into believing they are.
Thanks a lot. Aren't you double counting the last year contribution when in the DCF calculation, you count that year's FCF in the "(+) Sum of PV of Free Cash Flows" part and also count that year's Ebitda in the "Baseline Terminal Value" part?
No. The Terminal Value represents the PV of the company's cash flows from the end of Year 14 or beginning of Year 15 onward. The multiple is what someone else is willing to pay for the company at that stage for the company's cash flows starting at the beginning of Year 15.
Thank you for this video. Can you make a video on residual income ?
We have something like that in our Bank Modeling course. It's such a specialized topic that we probably won't cover it here.
Thank you for the great video!
I just have one quick question.
If an interview question is: you spend $1000 to build a new factory (capex), then how does it affect EV. Does it stay the same or increase? If so, by how much?
Enterprise Value increases by $1000 because you're swapping a non-core assets (Cash) for a core-business assets (the factory, which counts as PP&E).
@@financialmodeling But wouldn't an investment in PP&E (CAPEX) decrease my FCF and that decrease would reduce my Enterprise value?
If I do think about this scenario as in your answer, I do understand it but if I think about it in a more "formula way" I do not understand it. I mean, Capex would be an investing activity and reduce my FCF (and so my enterprise value). Where is my mistake?
Hope you can help me! Thx
@@undercover1923 Your thinking is incomplete. Yes, extra CapEx reduces UFCF in the short-term, but that investment will increase revenue and cash flow over the long-term, presumably by more than the upfront investment amount. You have to think about the whole cycle of an investment or spending process and the after-effects.
Always high quality stuff here, thanks a lot, Brian!
So, the Enterprise Value is equal to the present value of the future unlevered FCFs.
Is the Equity Value then equal to the present value of the future Net Income or dividends?
Equity Value is equal to the Present Value of Levered FCFs (so neither Net Income nor Dividends, as you must also factor in CapEx, Working Capital, non-cash add-backs, etc.). The main difference is that you also include the interest expense and mandatory debt principal repayments.
Thanks!