Technical questions

Enterprise and equity value questions

Solve EV ↔ equity bridge questions under time pressure: net debt, preferred, minorities, associates and dilution.

22 minadvancedFree lesson

Learning objectives

Explain the difference between enterprise value and equity value in one sentence each
Calculate diluted shares with the treasury stock method, including out-of-the-money options and RSUs
Move between equity value and enterprise value in both directions with every claim at the right sign

Enterprise value questions are the fastest way for an interviewer to check whether you understand who owns what. Enterprise value is the value of the operating business to all capital providers. Equity value is the part that belongs to ordinary shareholders. The bridge between them is every other claim on the business, plus any assets the operating value leaves out.

The questions are short and timed: you'll often be expected to answer in under a minute, out loud, without a calculator. So drill the bridge until the signs are automatic, and say the formula as you go so the interviewer can follow (and give credit even if the arithmetic slips).

The bridge (from equity value to EV)

EV = Equity value + Debt − Cash + Preferred + Non-controlling interests − Associates

Equity value: share price × **diluted** shares (market capitalisation)
Debt − Cash: net debt; include debt-like items such as lease liabilities when the cash flows exclude lease payments
Preferred, NCI: claims ranking ahead of, or alongside, ordinary shareholders on consolidated cash flows: added to reach EV
Associates: non-operating stakes whose profits are not in EBITDA: subtracted to reach EV

Treasury stock method (per option tranche)

Net new shares = n − (n × K) ÷ P if P > K, otherwise 0

n: number of options in the tranche
K: exercise (strike) price
P: current share price; the exercise proceeds n × K are assumed to buy back shares at P
RSUs: have no strike: add them in full

Why each sign is what it is. Think of a house bought partly with a mortgage: the house's value is the enterprise value, the mortgage is debt, and what the owner would keep after repaying it is equity value. Every line in the bridge follows one rule — match the claim to the cash flows the value is based on:

Debt and preferred are claims ahead of ordinary shareholders on the operating business, so they are part of EV and come off on the way to equity.
Cash is not needed to run the operations, so it is netted against debt.
Non-controlling interests are added because consolidated EBITDA includes 100% of subsidiaries that the parent only partly owns; the minority holders' share must be in EV for EV ÷ EBITDA to be consistent.
Associates are subtracted for the mirror-image reason: their profits are not in EBITDA, so their value should not be in EV either.

How to answer out loud. (1) State the direction ("equity to EV" or "EV to equity"). (2) Fix the share count first — diluted, by the treasury stock method. (3) Walk through the claims in a fixed order: debt, cash, preferred, minorities, associates. (4) Give the answer with its unit and, if time allows, one sentence on what it means. A fixed order is what stops a sign error under pressure.

Calculation

Exercise 1

Calculate

Drill 1 (target 30 seconds). 50m shares at SAR 12, debt SAR 200m, cash SAR 80m, nothing else. Enterprise value (SAR m)?

Your answer

Calculation

Exercise 2

Calculate

Drill 2 (target 60 seconds). Share price SAR 25, 80m basic shares, 6m options with a strike of SAR 15, and 1m restricted stock units. Diluted shares (m)?

Your answer

Calculation

Exercise 3

Calculate

Drill 3 (target 60 seconds). Share price SAR 10, 40m basic shares. Options: 5m with a strike of SAR 12, and 3m with a strike of SAR 6. Diluted shares (m)?

Your answer

Calculation

Exercise 4

Drill 4 (target 90 seconds). A DCF gives an enterprise value of SAR 1,500m. Debt 400, cash 120, preferred 60, non-controlling interests 45, investments in associates 35 (SAR m); 50m diluted shares. Value per share (SAR)?

Your answer

Concept check

Exercise 5

Check your understanding

Interviewer: "A company issues SAR 200m of new shares at the market price and uses all of it to repay debt. What happens to its enterprise value and its equity value?"

EV is unchanged; equity value rises by 200 (more shares at the same price) and net debt falls by 200. Only the mix of financing changed, not the operating business.EV falls by 200 because debt falls by 200.EV rises by 200 because the company raised 200 of new equity.Both are unchanged, because no cash stays in the company.

Worksheet

Exercise 6

Challenge: From share price to enterprise value

Build the bridge from the share price to enterprise value. Use the treasury stock method for each option tranche: write it so that a tranche that is out of the money adds zero (use IF), because the grader moves the share price and the strikes. RSUs count in full. Then compute equity value, net debt and enterprise value.

0/6 cells entered · Ctrl+. jumps to the next empty cell

B14

	A	B	C
1	Inputs (SAR m unless stated)
2	Share price (SAR)	18.00
3	Basic shares outstanding (m)	120.0
4	Options	Number (m)	Strike (SAR)
5	Tranche 1	8.0	10.00
6	Tranche 2	5.0	22.00
7	Restricted stock units (m)	2.0
8	Borrowings	650.0
9	Cash and equivalents	210.0
10	Preferred shares	80.0
11	Non-controlling interests	55.0
12	Investments in associates	40.0
13	Bridge
14	Net new shares, tranche 1 (treasury stock method, m)
15	Net new shares, tranche 2 (m)
16	Diluted shares (m)
17	Equity value (diluted market cap)
18	Net debt
19	Enterprise value

InputYou build (dashed while empty)Given, lockedNumber (m) · Net new shares, tranche 1 (treasury stock method, m)

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