EV & Equity Value

Equity value is the value of the company that belongs to common shareholders: share price times fully diluted shares. Enterprise value is the value of the core operating business to every capital provider. You bridge from one to the other by adding debt, preferred stock, and noncontrolling interest, and subtracting cash and other non-operating assets.

• Equity value uses fully diluted shares, not basic
• Enterprise value covers all capital providers
• Add debt, preferred, and noncontrolling interest
• Subtract cash and non-core assets
• Enterprise value is capital-structure neutral, equity value is not

Whether you can explain the logic of the bridge rather than reciting it.

Start with equity value: $20 times 50 million shares is $1 billion. Then add debt of $400 million, because an acquirer inherits it, and subtract cash of $150 million, because an acquirer gets to use it. That gives net debt of $250 million and enterprise value of $1.25 billion. With preferred or minority interests outstanding I would add those too.

• Equity value is $20 times 50 million, so $1 billion
• Add debt of $400 million, subtract cash of $150 million
• Net debt is $250 million
• Enterprise value is $1.25 billion
• Name preferred and NCI as the other additions even when absent

Whether the arithmetic is clean and you say why each item moves, not just which direction it moves.

Because the check to shareholders is only part of the cost. You buy the equity, but you also inherit the target's debt, which you have to repay or refinance, and you gain its cash, which you can immediately use to fund the price. Net of those two, the true economic cost is equity value plus debt minus cash, which is enterprise value.

• The equity check buys the shares, but the debt comes with them
• Inherited debt must be repaid or refinanced, so it is real cost
• Acquired cash offsets the price, so it is a real credit
• Net cost equals equity value plus debt minus cash, which is EV
• This is why EV is the number compared across differently levered targets

Whether you can explain the bridge as an economic statement about cost rather than a formula to recite.

Neither changes. The share count doubles and the price halves, so market capitalization is identical, and nothing has happened to debt or cash, so enterprise value is untouched. No cash entered or left the business and no claim on it changed. The only real effects are cosmetic: a lower price per share can improve liquidity and let smaller investors buy round lots.

• Share count doubles, price halves, equity value unchanged
• Debt and cash are untouched, so enterprise value unchanged
• No cash moves and no claim changes
• Per share metrics like EPS halve mechanically
• Real effects are liquidity and accessibility, not value

Whether you can distinguish a change in value from a change in units. It is the simplest version of a question asked in harder forms later.

Equity value rises by $100 because there are more shares outstanding. Enterprise value is unchanged: you added $100 of equity value but also $100 of cash, and the cash gets subtracted right back out in the bridge. In theory financing events do not change enterprise value, because the operating business has not changed at all.

• Equity value up $100
• Cash up $100, which offsets in the bridge
• Enterprise value flat
• Financing events do not change enterprise value in theory
• The core operations are untouched, which is the underlying reason

Whether you understand enterprise value is capital-structure neutral, which is the entire point of the metric.

Strictly you should subtract only excess cash. Some cash is genuinely operating: the float a retailer needs in tills and the working balance that keeps payroll running. That cash is as much a part of the business as inventory, so removing it overstates how cheap the company looks. In practice most people subtract the full balance because the operating portion is not disclosed, but you should flag it.

• The principle is that only excess cash is non-operating
• Operating cash is a working asset, like inventory
• Restricted or escrowed cash is not available and should be excluded too
• In practice the split is not disclosed, so the full balance is usually netted
• Matters most for retailers and banks, where operating balances are large

Whether you know the theoretical answer and the practical one, and can say why they differ.

Mechanically, nothing real. Net income falls by $500 million and book equity falls with it, but no cash moves, and goodwill impairment is generally not tax deductible, so there is not even a tax saving. Cash, debt and future cash flows are all unchanged, so market equity value and enterprise value should be unaffected. What moves the stock is the signal that a past acquisition underperformed.

• Non-cash charge, so no cash flow effect
• Goodwill impairment is generally not tax deductible, so no tax shield
• Book equity falls, but market equity value should not
• Enterprise value is unchanged since debt and cash are unchanged
• Any share price move is a signal about the acquisition, not the accounting

Whether you flag the non deductibility. Candidates default to assuming every write down creates a tax saving.

Treasury stock method first: the 5 million options are in the money, exercise brings in $75 million, which buys back 3 million shares at $25, so net dilution is 2 million. Fully diluted shares are 42 million, and equity value is 42 times $25, so $1,050 million. Enterprise value is $1,050 plus $300 debt plus $50 preferred plus $30 NCI less $120 cash, which is $1,310 million.

• Options are in the money at $15 against $25
• Proceeds $75m buy back 3m shares at $25, net dilution 2m
• Diluted shares 42m, equity value $1,050m
• Add debt, preferred and NCI, subtract cash
• Enterprise value $1,310m

Whether you apply the treasury stock method rather than just adding all 5 million option shares.

Because the parent consolidates 100% of a subsidiary it does not fully own. EBITDA and revenue include all of that subsidiary, but the parent's equity value only reflects its own share. Adding back the noncontrolling interest puts the numerator and denominator on the same basis, so an EV/EBITDA multiple compares like with like.

• Consolidation brings in 100% of the sub's financials
• Parent equity value reflects only the parent's ownership
• Adding NCI aligns the numerator with the fully consolidated denominator
• The general rule: if the metric includes it, the value must include it
• Equity investments work the reverse way and are subtracted

Whether you can state the general principle rather than memorizing which items get added.

Total debt is the revolver, term loan, notes and finance leases: 50 plus 300 plus 250 plus 40, so $640 million. Against that I net only cash the company can actually use: $110 million of cash plus $60 million of marketable securities, which are cash equivalents. I exclude the $25 million of restricted cash because it is committed to escrow. Net debt is $640 million less $170 million, so $470 million.

• Include finance leases in debt, they are borrowings in substance
• Total debt is $640 million
• Marketable securities count as cash equivalents
• Restricted cash is excluded because it is not available
• Net debt is $470 million

Whether you catch the restricted cash. It is planted in the question, and most candidates net it without thinking.