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Investment Banking · Topic lesson

Enterprise Value

Equity value, enterprise value and the bridge between them: what moves each, diluted shares, convertibles and leases.

5 chapters About 58 minutes0 of 5 complete
Start chapter 1

Half of all valuation questions rest on one distinction: equity value is what the shareholders own; enterprise value is what the business itself is worth to everyone who funds it. Every multiple, every DCF and every deal price sits on one side of that line or the other, and interviewers test whether you know which.

  • Equity value is diluted shares × share price. It pairs with net income, EPS and levered free cash flow.
  • Enterprise value is equity value plus debt, preferred stock and minority interest, minus cash. It pairs with revenue, EBITDA, EBIT and unlevered free cash flow.
  • The bridge between them works in both directions: forwards from a share price to EV for a comps table, backwards from a DCF's EV to a share price.
The rule that solves every question

Enterprise value is the operations; equity value is one claim on them. Anything that only reshuffles the claims leaves enterprise value alone. Then count each claim exactly once: every share that will exist, every debt-like obligation, and never the same claim twice.

How to build enterprise value

The order to work in. Each step points to the chapters that practice it.

  1. 1
    Count the shares

    Basic shares, plus the net new shares from options, RSUs and in-the-money convertibles.

    Chapter 3Chapter 4
  2. 2
    Price the equity

    Diluted shares × share price is equity value.

    Chapter 1
  3. 3
    Add the other claims

    Debt, preferred stock, minority interest, out-of-the-money convertibles and, on the IFRS 16 basis, lease liabilities.

    Chapter 1Chapter 4Chapter 5
  4. 4
    Subtract the cash

    A buyer inherits it, so the operations cost that much less.

    Chapter 1
  5. 5
    Test what moves it

    Financing reshuffles the claims; only a change to the operating assets moves enterprise value.

    Chapter 2

Chapters

1

Equity value to enterprise value

12 min

What the shareholders own versus what the whole business is worth, and the bridge between them.

  • Build enterprise value from equity value, line by line
  • Explain why debt, preferred stock and minority interest are added, and cash is subtracted
  • Run the bridge backwards from an enterprise value to a share price
  • Pair enterprise value and equity value with the right metrics
2

What moves enterprise value

10 min

Raise debt, issue shares, pay a dividend, buy a machine: which of them changes what the business is worth?

  • Say whether an event changes equity value, enterprise value, both or neither
  • Explain why financing decisions leave enterprise value alone
  • Read which transaction happened from before-and-after figures
  • Compare a dividend and a buyback per share
3

Diluted shares and the treasury stock method

12 min

Why options add fewer shares than there are options, and why dilution grows as the share price rises.

  • Calculate diluted shares with the treasury stock method
  • Explain why only in-the-money options count, and why RSUs count in full
  • Work back from net new shares to the strike price
  • Explain why a higher share price means more dilution
4

Convertible bonds

12 min

A bond that can become shares: count it as one or the other, never as both.

  • Decide whether a convertible is treated as shares or as debt
  • Calculate conversion shares, diluted shares and enterprise value
  • Work out the conversion price from the shares a convertible would create
  • Explain what the gap between the two treatments represents
5

Leases in enterprise value

12 min

When rent moves below EBITDA, the lease has to move into enterprise value: the consistency rule.

  • Calculate enterprise value with and without lease liabilities
  • Explain why IFRS 16 raises EBITDA, and what that means for EV
  • Spot a mismatched EV/EBITDA multiple and correct it
  • Work out the lease liability implied by a lease-inclusive multiple