Every concept, endless questions
Each concept is a small financial model. Read how it works, then draw a real interview question from it: forwards, backwards or what-if, with fresh numbers and a worked solution every time.
Forward runs a concept the usual way. Inverse runs it backwards, which is what separates understanding from memorizing.
Enterprise Value
5 conceptsEquity value to enterprise value bridge
Equity value is what the shareholders own. Enterprise value is what the whole business is worth to everyone who has a claim on it: shareholders, lenders, preferred holders and minority partners. So you start from equity value, add every other claim, and subtract cash — because a buyer inherits the cash and can use it to pay down the debt they also inherit. Moving cash or debt around does not change what the operations are worth; it only changes who owns the claims.
Treasury stock method diluted shares
Options are only dilutive if they are worth exercising — strike below the share price. When holders exercise, they pay the strike price to the company. The treasury stock method assumes the company spends that cash buying back its own shares at the market price, so the true dilution is the options issued less the shares repurchased with the proceeds. Restricted stock units carry no strike, so every unit is a new share. Options with a strike above the price are ignored: nobody exercises at a loss.
Convertible bonds: if-converted versus debt
A convertible bond is debt with an option to swap it for shares at a fixed conversion price. If the shares trade above that price, holders will convert, so you treat the bond as equity: add the conversion shares to the diluted count and leave the bond out of debt. If the shares trade below it, holders keep the bond, so it stays in debt and adds no shares. Never do both — counting the shares AND the debt double-counts the same claim. The two treatments give different enterprise values, and the gap is exactly how far in the money the conversion option is.
Operating leases in enterprise value
Under IFRS 16 (and largely ASC 842) leases sit on the balance sheet as a liability, and the old rent expense is replaced by depreciation and interest — both below EBITDA. So EBITDA goes UP by the rent. That is only a fair comparison if enterprise value goes up too: the lease liability is a debt-like claim on the business and belongs in the bridge. The rule is consistency. Either use the higher EBITDA with an EV that includes lease liabilities, or the lower, pre-lease EBITDA with an EV that excludes them. Mixing them makes the company look cheaper than it is.
What moves enterprise value versus equity value
Enterprise value is the value of the operations. Equity value is the slice of that value, plus the cash, minus the debt, that belongs to shareholders. So a financing decision — raising debt, issuing shares, paying dividends, buying back stock — shuffles claims without changing the operations, and leaves EV alone. Only something that changes the operating assets moves EV. Turning cash into a factory moves EV up by the cash spent; shareholders own the same total, so equity value stays put. Ask two questions of any event: did the operations change, and did cash cross the line to or from shareholders?