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Equity Value Versus Invested Capital

Value can be considered on three levels:

  1. The value of the enterprise before taking into account its cash and debt
  2. The market value of invested capital (MVIC), which is equal to enterprise value plus cash
  3. Equity value, which is MVIC less debt.

An example illustrates the differences. Suppose an acquirer agrees to buy the stock of a company for $1 million, and the company has $2 million in debt. Will the buyer assume the debt or not? In this example, the value of the equity is $1 million, and the MVIC is $3 million.

Now suppose the company has $500,000 in cash. Will the seller transfer the cash to the buyer? The enterprise value is $2.5 million, which is the MVIC less the cash.

These distinctions can be important when considered public company multiples. A price/earnings (PE) multiple is a multiple of the company’s net income. It provides an indicator of the value of equity because net income has been reduced by interest expenses or increased by interest income. A multiple of earnings before interest expense (EBIT or EBITDA) is an indicator of MVIC.

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