Non controlling interest in calculation of EV (Enterprise Value)

CFA Level II Equities
#1

Hi,

In the Wiley study videos, I came across a formula for EV (Enterprise Value) which is given below:

Market value of common equity + Market Value of Preferred Equity + Market Value of Debt + Non-Controlling Interest - Cash & Short term investments.

My question is, why are we adding Non-controlling interest? When we account for ‘Market Value of Common Equity’, aren’t we already accounting for all equity held by shareholders, whether controlling or not controlling?

Is this a mistake in the formula or have I misunderstood somewhere?

Thank you and god bless

#2

So if Company A purchases a controlling stake in company B (say 70%), the acquirer would usually consolidate the targets financials with his own assuming a 100% acquisition. This means that the EBITDA which should be just 70%, also includes the non controlling 30% interest.

Coming to EV/EBITDA, since the EBITDA also includes the additional 30%, you will have to balance that by adding minority interest in the numerator. In reality you can either do this, or include just 70% of the targets Income statement nos, whereby you don’t have to add the minority interest.