## What percentage dilution in Equity Value is “too high?”

There’s no strict “rule” here but most bankers would say that anything over 10% is odd. If your basic Equity Value is \$100 million and the diluted Equity Value is \$115 million, you might want to check your calculations – it’s not necessarily wrong, but over 10% dilution is unusual for most companies.

## Should you use the book value or market value of each item when calculating Enterprise Value?

Technically, you should use market value for everything. In practice, however, you usually use market value only for the Equity Value portion, because it’s almost impossible to establish market values for the rest of the items in the formula – so you just take the numbers from the company’s Balance Sheet.

## Are there any problems with the Enterprise Value formula you just gave me?

Yes – it’s too simple. There are lots of other things you need to add into the formula with real companies: • Net Operating Losses – Should be valued and arguably added in, similar to cash. • Long-Term Investments – These should be counted, similar to cash. • Equity Investments – Any investments in other … Read moreAre there any problems with the Enterprise Value formula you just gave me?

## What’s the difference between Equity Value and Shareholders’ Equity?

Equity Value is the market value and Shareholders’ Equity is the book value. Equity Value can never be negative because shares outstanding and share prices can never be negative, whereas Shareholders’ Equity could be any value. For healthy companies, Equity Value usually far exceeds Shareholders’ Equity.

## A company has 1 million shares outstanding at a value of \$100 per share. It also has \$10 million of convertible bonds, with par value of \$1,000 and a conversion price of \$50. How do I calculate diluted shares outstanding?

This gets confusing because of the different units involved. First, note that these convertible bonds are in-the-money because the company’s share price is \$100, but the conversion price is \$50. So we count them as additional shares rather than debt. Next, we need to divide the value of the convertible bonds – \$10 million – … Read moreA company has 1 million shares outstanding at a value of \$100 per share. It also has \$10 million of convertible bonds, with par value of \$1,000 and a conversion price of \$50. How do I calculate diluted shares outstanding?

## How do you account for convertible bonds in the Enterprise Value formula

If the convertible bonds are in-the-money, meaning that the conversion price of the bonds is below the current share price, then you count them as additional dilution to the Equity Value; if they’re out-of-the-money then you count the face value of the convertibles as part of the company’s Debt.

## Why do we add Preferred Stock to get to Enterprise Value?

Preferred Stock pays out a fixed dividend, and preferred stock holders also have a higher claim to a company’s assets than equity investors do. As a result, it is seen as more similar to debt than common stock.

## Could a company have a negative Equity Value? What would that mean?

No. This is not possible because you cannot have a negative share count and you cannot have a negative share price.

## Could a company have a negative Enterprise Value? What would that mean?

Yes. It means that the company has an extremely large cash balance, or an extremely low market capitalization (or both). You see it with: 1. Companies on the brink of bankruptcy. 2. Financial institutions, such as banks, that have large cash balances. These days, there’s a lot of overlap in these 2 categories…

## Is it always accurate to add Debt to Equity Value when calculating Enterprise Value?

In most cases, yes, because the terms of a debt agreement usually say that debt must be refinanced in an acquisition. And in most cases a buyer will pay off a seller’s debt, so it is accurate to say that any debt “adds” to the purchase price. However, there could always be exceptions where the … Read moreIs it always accurate to add Debt to Equity Value when calculating Enterprise Value?