Equity Value
The value of 100% of a company's shares — what belongs to equity shareholders after debt and preference capital are deducted from enterprise value. For a listed company, its market capitalisation.
In plain language
Think of a business as a house bought partly with a home loan. The house has one value. How much of that value is yours depends on how much you still owe the bank.
The workbook draws the same line. Enterprise value is the value of the business regardless of whether it is financed by debt or by equity — the value of the total capital in it. Equity value is the value of 100% of the shares of the company. It measures the total value belonging to equity shareholders after all other claims on the business, including debt and preference capital, have been deducted. For a listed company the market already puts a number on it: market capitalisation.
An AIF almost always buys shares, not the whole business. So whatever valuation method is used, the number that finally matters to the fund is equity value, divided by the number of shares.
How it works
The bridge between the two values (section 11.4.1):
Enterprise Value = Equity Value (Market Cap) + Total Debt (net of cash) + Preference capital (if any)
so
Equity Value = Enterprise Value − Total Debt (net of cash) − Preference capital
The workbook's Illustration 11.3: market cap Rs 1,000 crore, long-term debt Rs 200 crore, preference capital Rs 50 crore, cash Rs 5 crore. Enterprise value = 1,000 + (200 − 5) + 50 = Rs 1,245 crore.
Which methods give which value.
- DCF discounts free cash flow at WACC and gives enterprise value. In the section 11.6 worked example, enterprise value of Rs 29,521.57 lakh less assumed debt of Rs 1,324 lakh gives an equity value of Rs 28,197.57 lakh; divided by 50 lakh shares, Rs 563.95 per share.
- Relative valuation multiples such as EV/EBITDA "determine the Enterprise value". To reach equity value, the book value or market value of outstanding debt has to be deducted.
- Asset-based valuation labels its outputs explicitly in Illustration 11.4: the net asset value computation gives "Tangible net worth (Equity Value of the Business)" and the break-up computation gives "Break-up value of business (Equity Value)", while the replacement cost computation gives "Replacement Value of business (Enterprise Value)".
- Start-up DCF (Annexure 11.1): enterprise value of Rs 187.75 lakh with no outstanding debt is also the equity value; an illiquidity discount of around 10% then brings the equity valuation to Rs 169 lakh.
A worked example
Illustrative figures. Kaveri Growth Fund, a Category II AIF, is negotiating a stake in Nashik Auto Components Pvt Ltd. Its DCF model gives an enterprise value of Rs 480 crore. The balance sheet shows:
| Item | Rs crore |
|---|---|
| Term loans | 130 |
| Cash and bank | 20 |
| Preference share capital | 30 |
Net debt = 130 − 20 = Rs 110 crore
Equity value = 480 − 110 − 30 = Rs 340 crore
Shares outstanding = 2 crore
Value per share = 340 / 2 = Rs 170
The fund proposes to buy 10% of the equity, which is worth Rs 34 crore at this valuation — not 10% of Rs 480 crore, which would be Rs 48 crore.
Now run it from the other side. Suppose a listed peer has a market capitalisation of Rs 340 crore and the same debt, cash and preference capital. Its enterprise value is 340 + 110 + 30 = Rs 480 crore. Same business, same two numbers, the bridge crossed in the opposite direction.
Why NISM asks about it
Chapter 11 (Valuation) sets up the enterprise value / equity value distinction at 11.4.1 "before we attempt to understand the various methodologies", then returns to it in every method: the DCF worked example at 11.6, the note on relative valuation at 11.7, asset-based valuation at 11.5 and start-up valuation in Annexure 11.1. Expect a direct computation from the EV bridge and a conceptual question on which methods give enterprise value and which give equity value.
Common exam traps
- Debt is taken net of cash in the workbook's formula, and preference capital is added to equity value to reach EV — so it is deducted to go the other way. Forgetting preference capital is the commonest arithmetic slip.
- EV/EBITDA and other relative valuation multiples give enterprise value, not equity value. Deduct debt before dividing by shares.
- Equity value and market capitalisation are the same thing for a listed company — the workbook uses them as synonyms.
- In Illustration 11.4, book value and break-up value are labelled equity value, but replacement value is labelled enterprise value, because the replacement computation starts from total assets and deducts no liabilities.
- The workbook quotes two different enterprise values for the same company. The section 11.6 DCF table shows enterprise value of Rs 29,521.57 lakh, while Illustration 11.5, "considering the Enterprise Value in the DCF illustration in section 11.6", uses Rs 26,737.79 lakh to compute an EV/EBITDA multiple of 14.26. Use whichever figure the question gives you.
Where this is taught
- Series XIX-A · Chapter 11: Valuationintroduced here
- Series XIX-C · Chapter 14: Valuationintroduced here
- Series XIX-E · Chapter 12: Valuationintroduced here
- Series XIX-D · Chapter 11: Valuationintroduced here
Related terms
- Discounted Cash FlowA valuation method that estimates the cash a business will generate in future years and converts each year back to what it is worth today.
- Enterprise ValueWhat it would cost to buy the whole business — market capitalisation plus debt, less cash — as opposed to market capitalisation, which buys only the equity.
- Relative valuationValuing an asset from the prices of comparable assets rather than from its own cash flows — quick, intuitive, and dependent on whoever set those comparable prices being right.
- EV/EBITDAEnterprise value divided by EBITDA — a whole-firm valuation multiple that compares what it would cost to buy the business against the cash profit the business generates for all its funders.
- Break-up Value ApproachAn asset-based valuation that measures what a company would fetch if it were shut down on the valuation date and sold in pieces — liquidation value of assets less settlement value of debt.
- Free Cash FlowThe cash a company generates from operations after reinvesting in working capital and routine capital expenditure — the figure a DCF valuation projects for about five years and discounts at WACC.
- Replacement Cost ApproachAn asset-based valuation that values a business at what it would cost to replace it as it stands today, including set-up costs — suited to businesses with high entry barriers or setting-up costs.
- Economic profit approachA business valuation approach in which value is the capital presently employed in the business plus the present value of the economic profit it is projected to earn in future.
- Price to Earnings multipleShare price divided by earnings per share — the workbook's most widely used market multiple, and a trading comp an AIF can apply to an unlisted company only through its listed peers.
- Specific Company Risk PremiumAn extra slice added to the discount rate for one particular company, on top of beta and the market risk premium, to price the unsystematic risk that the CAPM does not capture.