the difference between asset value and enterprise value,?

CFA Level II
#1

can someone help me understand why enterprise value have to take out all the cash to calculate and asset value doesnt have to? what’s the rationale underneath this. and why asset value doesn’t exclude the common stock?

For example I am referring to reading 38, EOC exercise question 13, here the asset based approach shows the value of the firm is total asset - liabilities, and liabilities is the book value of all liabilities. I am just really confused, can someone elaborate on EV and Asset value for me so I have a grip of this ****?

#2

The rationale is that if you buy cash, it reduces your purchase price.

Imagine that you bought a wallet for $100, but when you open it, you discover it contains $40. You really paid only $60 for the wallet itself.

Think of the cash you get as a rebate.

#3

yes, but when calculating asset value, they included cash how?

and common stock is not counted in asset value, why is that

#4

Because cash is an asset.

It’s simply a perfectly liquid asset that offsets the purchase price.

You have two sides to a balance sheet:

  • Assets
  • Liabilities and equity

Assets are . . . well . . . assets. Stuff of value.

Liabilities and equity simply tell you who owns the assets, and in what proportions.

#5

now look closer at the question, it asked

Using an asset-based approach, the value (net of debt) is closest to

So i guess they want the asset value net of debt ? what is this suppose to indicate though? the asset, the value on book of the things you are buying , and common stock is not part of it

Now think back i think enterprise value,EV= long term debt + equity - cash - short term investment,is really about the value of cash generating unit in ur enterprise, while asset is just the asset, why is it discounting debt from this asset value calculation though?

#6

Asset value net of debt is equity value.

If you buy a company, you still have to pay off the debt; you’re really buying only equity.

Remember your Level I accounting equation:

A = L + E

A − L = E

#7

thats what i thought! now thinking about it, the question is actually really asking your , ok the land asset has adjustment, there is asset book value but here is the fair value, so what is fair equity value you should pay

The question looks tricky, thanks for explaining, again, with all these details i really dont know how there are people finishing an eoc exercise set after a reading in 30 min…

#8

My pleasure.

Take a deep breath, then dive in.

#9

also, can you help me understand enterprise value and enterpise value/EBITDA’s concept a bit better, what is it measuring in the core?