Enterprise Value Vs Equity Value

 What have we actually valued?

 Have we valued what it means
to own that asset as an equity
 holder, or have we valued
the actual business?
 The answer is, we've
actually valued the business.
 And this exercise leads
to what we typically
 call an enterprise
value, because it's
 a value of the business.
 Why is that?
 Well, what did we value?
 We valued the free cash flows
generated by the business.
 And as a consequence,
we're ending up
 with a value of the business.
 Well, how do I go from there to
thinking about equity values?
 And the answer is,
well, it depends
 on how much debt
that company has
 and how much cash
that company has.
 Sometimes, enterprise
values will be much more
 than the market value of equity.
 Why?
 If there's a lot of
debt, the combination
 of the debt value
and the equity value
 should be the same
as enterprise value.
 Said another way, how much
do you pay for a company?
 Well, if the enterprise value
is $100 and there's $40 of debt,
 the equity value is only $60.
 But the example can go the other
way, which is, in some cases
 that are increasingly
prevalent today,
 if companies hold a lot of
cash, the situation is flipped.
 And actually, enterprise values
can be less than market values.
 Why?
 Well, because that
market value really has
 two things associated
with it-- a bunch
 of cash and the
underlying business.
 So in one situation,
enterprise value
 is larger than the
market value of equity
 because of a lot of debt.
 In the other situation,
enterprise value
 is less than market value
because the market value
 of equity is really two
things, the business
 and a big pile of cash.
 If you take a look at
Apple back in 2013 or 2014,
 you'll see that market value
was $500 or $600 billion,
 but they held more
than $100 billion
 in cash, which we can
think of as excess cash.
 As a consequence, the actual
implicit value on the business
 was lower.
 The important lesson
here is, we are all
 about valuing the business.
 That's what this free cash
flow analysis is about.
 From there, to get to the value
of the equity of a company,
 we have to think about
how much debt there is
 and how much cash there is.

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