Net Asset Value Data Definition – The Definitive Guide to Debt and Leveraged Finance
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Net Asset Value Data Definition
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Net Asset Value (NAV) measures the market value of an investment fund, or mutual fund, and is equal to the total value of assets minus total liabilities.
Net asset value (NAV) usually comes up in the context of mutual funds, as the metric serves as the basis for pricing mutual fund shares.
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NAV per unit represents the price at which units (ie, ownership shares) in a mutual fund can be bought or redeemed, usually at the end of each trading day.
A mutual fund’s NAV is a function of the market value of all the securities in its portfolio.
However, as with the valuation of individual public stocks, past performance of mutual funds is not indicative of future performance.
Further, the mutual fund’s objective, risk/reward profile and timing should match the investor’s criteria and not just evaluate the fund based on their NAV.
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Since NAV is usually expressed on a unit value basis, i.e. per share, the NAV must be divided by the total number of units outstanding.
Formula Net Asset Value (NAV) = Fund Assets – Fund Liabilities Net Asset Value (NAV) per Unit = (Fund Assets – Fund Liabilities) Units Example of NAV Calculation of a Maturity Mutual Fund
For example, if a mutual fund has a total equity value of $100 million and liabilities of $20 million, the fund’s NAV is $80 million.
Now that we have subtracted the fund’s debt (liabilities) from the value of the fund’s property (assets), the next step is to divide by the total number of units payable.
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Assuming the mutual fund has 2 million units, the NAV per share becomes $40.00.
For example, the NAV of an exchange-traded fund (ETF) is based on its underlying securities, while the market price of an ETF is based on supply/demand in the market.
So far, we’ve discussed net asset value (NAV) in the context of mutual funds, but another use case for NAV is real estate investing—eg. Real Estate Investment Trusts (REITs).
Here NAV equals the fair market value (FMV) of the real estate asset, which includes any debt, fixed costs and capital expenditure (capex).
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NAV REIT Valuation Model Step 1: Value Net Operating Income (NOI) Property Generation in Real Estate Portfolio Step 2: Value Side Income Stream – e.g. Ancillary income, management fee, joint venture (JV) income Step 3: Reduce NAV by required expenses (such as overhead) and expected future capital expenditure (CAPEX) Step 4: Add “non-operating” REIT assets – e.g. Cash, construction in progress Step 5: Deduct debt owed and non-equity requirements
After the last step, the end result is the value of equity derived from the NAV, which can be divided by the value of its market share over the outstanding shares.
The book value of US REITs is not marked by their fair market value (FMV) – but the NAV model adjusts the REIT’s balance sheet to reflect the FMV of the assets with capitalization rate (“cap rate”) assumptions.
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Get instant access to video tutorials taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Enterprise value (EV) is a measure of the total value of a company. It looks at total market value, not just equity value, so all ownership interests and property claims, both debt and equity, are included. EV can be considered the effective value of the acquisition of the company or the theoretical price of the target company (before consideration of the takeover premium).
EV = Common Stock + Preferred Stock + Market Value of Debt + Minority Interest – Cash and Equivalents
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The value of a company can be determined from the assets it owns. However, getting the market value of each property can be quite complex and difficult. Instead we can see how the property was paid for.
A simple accounting equation can be a guide by looking at assets as a use of funds and liabilities as well as stockholders’ equity as a source of funds used to finance those assets. When we say value, we mean the current or market value of the company, so we consider the market value of liabilities and the market value of equity.
The cost of equity is calculated by subtracting the company’s fully diluted shares and multiplying it by the current market value of the shares. Fully diluted means that it includes at-the-money options, warrants and convertible securities in addition to the original shares.
If a company plans to acquire another company, it must pay at least the market capitalization value to the shareholders of that company. This alone is not considered an accurate measure of a company’s true value, and for this reason other elements are added to it, as seen in the EV equation.
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Total debt is the contribution of banks and other creditors. They are interest-bearing liabilities and include short-term and long-term debt. The amount of the loan is adjusted by subtracting cash from it because, in theory, when acquiring a company, the acquirer can use the target company’s cash to pay off part of the assumed debt. If the market value of the loan is unknown, the book value of the loan can be used instead.
Preference shares are hybrid securities that have both equity and debt characteristics. In this case, they are considered more like debt because they pay fixed dividends and have a higher priority in asset and profit claims than common stocks. When purchased, they usually have to be paid off as debt.
A non-controlling interest is not part of a subsidiary owned by a parent company (which has more than 50% but less than 100% of the subsidiary’s position). The financial statements of this subsidiary are consolidated in the financial results of the parent company.
We add this minority interest to the EV calculation because the parent company has consolidated its financial statements with this minority interest; Which means the parent includes 100% of its revenues, expenses and cash flow in its numbers, even though it doesn’t own 100% of the business.
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It is the most liquid asset in the company statement. Examples of cash equivalents include short-term investments, marketable securities, commercial paper, and money market funds. We will deduct this amount from the EV as it will reduce the acquisition cost of the target company. It is assumed that the acquirer will use cash immediately to pay a portion of the notional purchase price. In particular, it was used to pay dividends immediately or repay loans.
Enterprise value is often used for multiples such as EV/EBITDA, EV/EBIT, EV/FCF or EV/Sales such as trading comps. Other formulas, such as the P/E ratio, usually do not consider cash and debt, such as electric cars. Thus, two similar companies with the same market capitalization may have two different enterprise values.
For example, Company A has $60 million in market capitalization, $20 million in cash, and no debt. Company B, on the other hand, has $60 million in market capitalization but no cash and $30 million in debt. In this simple scenario, we see that Company A is cheaper to buy because it has no debt to cover creditors.
Enterprise value is very useful in merger and acquisition situations, especially when controlling ownership interests. In addition, it is useful for comparing companies with different capital structures, as a change in capital structure will affect the amount of enterprise value.
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In financial modeling, it is common to model a firm’s free cash flows (FCFF), which is based on the cash flows derived from 100% ownership of all assets and therefore determines the enterprise value of the company.
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