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GURBACHAN SHARMA
(Querist)
24 August 2016
VALUE OF EQUITY = ENTERPRISE VALUE - ALL INTEREST BEARING LIABILITY(AIBL) - NON INTEREST BEARING LIABILITY ( NIBL)
OR
VALUE OF EQUITY = ENTERPRISE VALUE - AIBL.
WHICH ONE OF ABOVE IS CORRECT?
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GURBACHAN SHARMA
(Querist)
24 August 2016
if second equation is correct then tell me why NIBL not considered ??
25 July 2025
Great question! This is a classic one in **valuation theory** and understanding the difference between **Enterprise Value (EV)** and **Equity Value**.
---
### Let me clarify the two equations you mentioned:
1. **Value of Equity = Enterprise Value – All Interest Bearing Liabilities (AIBL) – Non-Interest Bearing Liabilities (NIBL)**
2. **Value of Equity = Enterprise Value – Only Interest Bearing Liabilities (AIBL)**
---
### Which one is correct?
✅ **The second one is correct:**
**Equity Value = Enterprise Value – Interest Bearing Liabilities**
---
### Why?
**Enterprise Value (EV)** represents the **total value of the firm’s operating assets**, funded by both debt and equity. It includes:
* Market value of equity (Equity Value)
* Market value of interest-bearing debt (AIBL)
* Minority interest, preferred stock (if any)
* **Less: cash and cash equivalents** (sometimes added back)
---
### Important:
* **Interest Bearing Liabilities (AIBL)** are deducted from EV to get the Equity Value because they represent the claims of debt holders who get paid before equity holders.
* **Non-Interest Bearing Liabilities (NIBL)** such as accounts payable, accrued expenses, etc., are part of the **working capital** and are already embedded in the EV calculation.
**NIBL are short-term operating liabilities**, not financing liabilities, so they are NOT deducted again to get Equity Value.
---
### In short:
* EV includes NIBL on net basis (since EV is based on **operating assets minus operating liabilities**),
* But AIBL is a financing liability and must be deducted to arrive at Equity Value.
---
### To summarize:
| Formula | Explanation |
| ----------------------------------- | ------------------------------------------------------- |
| **Equity Value = EV – AIBL** | Correct — reflects claims of equity holders after debt. |
| **Equity Value = EV – AIBL – NIBL** | Incorrect — double counts NIBL which is part of EV. |
---
If you want, I can also help you with formulas and a simple example to illustrate this.
Would you like that?
---
### Let me clarify the two equations you mentioned:
1. **Value of Equity = Enterprise Value – All Interest Bearing Liabilities (AIBL) – Non-Interest Bearing Liabilities (NIBL)**
2. **Value of Equity = Enterprise Value – Only Interest Bearing Liabilities (AIBL)**
---
### Which one is correct?
✅ **The second one is correct:**
**Equity Value = Enterprise Value – Interest Bearing Liabilities**
---
### Why?
**Enterprise Value (EV)** represents the **total value of the firm’s operating assets**, funded by both debt and equity. It includes:
* Market value of equity (Equity Value)
* Market value of interest-bearing debt (AIBL)
* Minority interest, preferred stock (if any)
* **Less: cash and cash equivalents** (sometimes added back)
---
### Important:
* **Interest Bearing Liabilities (AIBL)** are deducted from EV to get the Equity Value because they represent the claims of debt holders who get paid before equity holders.
* **Non-Interest Bearing Liabilities (NIBL)** such as accounts payable, accrued expenses, etc., are part of the **working capital** and are already embedded in the EV calculation.
**NIBL are short-term operating liabilities**, not financing liabilities, so they are NOT deducted again to get Equity Value.
---
### In short:
* EV includes NIBL on net basis (since EV is based on **operating assets minus operating liabilities**),
* But AIBL is a financing liability and must be deducted to arrive at Equity Value.
---
### To summarize:
| Formula | Explanation |
| ----------------------------------- | ------------------------------------------------------- |
| **Equity Value = EV – AIBL** | Correct — reflects claims of equity holders after debt. |
| **Equity Value = EV – AIBL – NIBL** | Incorrect — double counts NIBL which is part of EV. |
---
If you want, I can also help you with formulas and a simple example to illustrate this.
Would you like that?
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