 # Formula 1 Purchased for \$8 billion, Enterprise Value vs Equity Value Explained

Posted by Lapp Realty Commercial Group on Tuesday, April 25th, 2017 at 3:17pm. With the sale of Formula 1 to Liberty Media Corporation, we see a lot of news articles speaking to the Formula 1 Enterprise Value of \$8 billion, with the equity value being \$4.4 Billion.

What is the difference between Enterprise Value and Equity Value you ask?

Equity Value is the simplest form is the total outstanding shares of a company (Market Cap) and can be calculated using the current value per each share outstanding.

As an example, if “Example Company Ltd” had 10,000 outstanding shares with a share price of \$10.00, the Equity Value of the company would be \$100,000.

The equity value alone typically will not give you an accurate representation of the TRUE value of a company.

Enterprise Value will represent the market value of the Business and its operating assets. We can calculate the enterprise value of a business as follows;

Enterprise Value = Equity (Market Cap) + Debt – Cash (and cash equivalents)

The Enterprise Value represents the value of the company’s CORE business operations.

Now, let’s translate this into a relatable example. Since we are talking about Formula 1, we’ll use a formula one car as an example. This won’t be a perfect translation, however will give you an idea of the difference between Equity value and Enterprise value.

Example:

Me and 9 of my friends decide to buy a used Formula One car from 1989. The cost is \$250,000, split 10 ways. We each pony up \$25,000 each, for a grand total of \$250,000. We are aware that we will need to spend an additional \$30,000 to get the car running (Liability), however the seller was generous and agreed to include a supercharger valued at \$10,000 (Cash Equivalent) at no cost.

Relating this to “Equity Value” or a “Market Cap”, the equity value of the Formula 1 car would be \$250,000.

 “Shares” Outstanding 10 Current Value Per “Share” \$25,000

Equity Value (\$250,000) = 10 Shares x \$25,000

Relating the above to Enterprise Value, we would end up with a Enterprise Value of \$270,000 as follows;

Enterprise Value = Equity (Market Cap) + Debt – Cash/Cash Equivalents

Enterprise Value = \$250,000 + \$30,000 – \$10,000

Enterprise Value = \$270,000

Not perfect, however hopefully this helps the understanding of Equity Value vs Enterprise Value.

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