51i: enterprise value

CFA Level I Equities
#1

The textbook states that enterprise value = common stock + preferred stock + debt - cash

It then states

" A potential problem with using enterprise value is that the market value of a firm’s debt is often not available ."

How is that possible? Aren’t the liabilities listed plain as day on the balance sheets? Why would we think the fair market value of debt is different from the book value of debt?

#2

They are, which is why the textbook _ doesn’t _ say that the book value of the firm’s debt is not available.

The _ market value _, on the other hand, isn’t listed on the company’s balance sheet; it exists only in the minds of the investors: the bondholders. And if the debt doesn’t trade frequently in the market, then the market value isn’t plain as day. Alas.

#3

what factors would make the book value of debt different from the market value of debt? Impending bankruptcy proceedings where the company might negotiate a reduced payment plan? What if there is no impending bankruptcy?

#4

Anything that would change the YTM on their bonds; e.g.,

  • Higher inflation than when the bonds were issued
  • Lower inflation than when they were issued
  • Higher general level of interest rates than when they were issued
  • Lower general level of interest rates than when they were issued
  • Higher perception of risk for that company’s debt
  • Lower perception of risk for that company’s debt
  • General increase in risk aversion
  • General decrease in risk aversion
  • and so on