Discounting and value
The equity bridge
Walk from enterprise value to equity value per share — every claim, with the right sign.
20 minadvancedMembers
Learning objectives
- Identify which claims are subtracted from or added to enterprise value
- Explain the sign of each bridge item from what the cash flows include
- Calculate equity value and value per share from a DCF enterprise value
Enterprise value is worth what the operating cash flows in your DCF are worth. To reach equity value, subtract every claim that ranks ahead of ordinary shareholders, and add every asset whose value is not in those cash flows.
The rule behind every sign is consistency: ask whether the item's cash flows were in the FCF you discounted.
Equity value = EV + Cash − Debt − Lease liabilities − Preferred − Non-controlling interests + Associates & investments
- Cash (+)
- excess cash: not needed for operations and its interest income is not in FCF
- Debt (−)
- borrowings rank ahead of shareholders; interest is excluded from unlevered FCF
- Lease liabilities (−)
- debt-like when FCF/EBITDA are before lease payments (IFRS 16); if lease costs are already deducted as operating costs, don't subtract them again
- Preferred (−)
- preferred shares rank ahead of ordinary shares
- Non-controlling interests (−)
- consolidated FCF includes 100% of subsidiaries that the company only partly owns; the minority's share is not ours
- Associates (+)
- equity-accounted stakes: their profits sit below EBIT and are not in FCF, so their value is added separately
Included with a Formula Quest membership
The rest of this lesson is for members. Members get the full lesson, including its 3 graded exercises, and every other Finance Quest lesson.