Question

Why are the following components important to the enterprise value formula?

-Fully diluted shares

-Treatment of convertible debt

-Pensions

-Change of control issues in minority interests

-Contingent consideration

Answer 1

EV = Common Shares + Preferred Shares + Market Value of Debt + Minority Interest – Cash and Equivalents

Fully Diluted Shares

Equity value is found by taking the company’s fully-diluted shares outstanding and multiplying it by a stock’s current market price.  Fully-diluted means that it includes in-the-money options, warrants, and convertible securities, aside from just the basic shares outstanding

Treatment of convertible debt

convertible debt is treated as if converted to equity and is not considered debt.

Change of control issues in minority interests

We add this minority interest to the calculation of EV because the parent company has consolidated financial statements with that minority interest

Contingent consideration and Pensions are not included in EVA formula

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