Investment Banking Essentials

Core Theme: In finance, everything revolves around value—buyers and sellers assess whether a company’s price aligns with its worth.
Two Key Values:
- Enterprise Value (EV): Value of the business itself (core operations).
- Equity Value (EQV): Value to shareholders (ownership perspective).

Definition 1: Intrinsic Value
- Formula: EV = Cash Flow\(Discount Rate - Cash Flow Growth Rate)
- Represents the sum of all future cash flows, assuming perpetual growth.
- Reflects the ultimate purpose of a company: generating money.
Definition 2: Core Business Value
- EV is the value of a company’s core business operations (assets generating recurring profits) to all investors (debt, equity, preferred, etc.).
- Core Business: Assets and operations tied to the business model and recurring profits.
- Limitation of Definition 1: Assumes constant, perpetual cash flow growth, which isn’t always realistic.
Cash and Core Business
- Cash: Not a core business asset (doesn’t generate profits directly).
- Example: Two identical firms, one with more cash, have the same EV because cash doesn’t affect core profitability unless invested in operations.

Definition: Value of all assets (core and non-core) to equity investors (common shareholders).
- EQV = What shareholders take home after selling the business and paying off liabilities.
Comparison to EV: EQV reflects ownership value, while EV focuses on operational value.
Relation to Balance Sheet: Theoretically, EQV equals Shareholders’ Equity (Assets - Liabilities), but in practice, market/intrinsic values differ from book values.

Scenario: Buying a house for $500K with $250K cash and $250K mortgage via a real estate company.
- EV = $500K: Value of core business assets (house’s intrinsic worth—land, renovations, etc.).
- EQV = $250K: Value to shareholders (after paying off the mortgage).
Change: Finding $100K cash in the house:
- EQV → $350K: Increases by $100K (non-core asset gain).
- EV → $500K: Unchanged (core house value remains the same).