Enterprise value to equity value bridge, with a worked example

Why there are two kinds of value

Enterprise value is the value of the operating business to everyone who funds it: shareholders, lenders, preferred holders and minority shareholders in subsidiaries. Equity value is the part that belongs to the common shareholders. A DCF of unlevered free cash flow and multiples of revenue or EBITDA give enterprise value, because those figures are earned before any claim is paid. P/E and the share price give equity value. The bridge converts one into the other, and it must be consistent with the metric: EV pairs with EBITDA, equity value with net income.

Step 1: diluted shares with the treasury stock method

Equity value is the share price times the fully diluted share count, not the basic one. In-the-money options will be exercised, and the treasury stock method assumes the company uses the exercise money to buy back shares at today's price, so only the net new shares count: =IF(price>strike,options*(1-strike/price),0). With 8 million options at an average strike of $25.00 and a price of $40.00, that is 3.0 million net new shares. Restricted stock units have no strike and count in full, here 2.0 million, so 120.0 million basic shares become 125.0 million diluted. The same method drives diluted EPS.

Step 2: from equity value to enterprise value

Start from equity value, $40.00 × 125.0m = $5,000m, and add every claim that ranks alongside or ahead of the shareholders, then subtract the assets that are not part of the operating business:

• + debt: borrowings and bonds, ideally at market value, here $1,400m. Lease liabilities go in too if your EBITDA is after IFRS 16 or ASC 842 lease accounting puts rent below EBITDA.
• + preferred stock and other debt-like items such as unfunded pension deficits, when they exist.
• + non-controlling interests ($120m): EBITDA consolidates 100% of partly owned subsidiaries, so the minority share of their value must be added.
• − cash and equivalents ($650m): a buyer of the whole company gets the cash back.
• − investments in associates ($90m): their profits are not in EBITDA, so their value is taken out.

Result: $5,780m, and the company trades at $5,780m ÷ $520m = 11.12x EBITDA. Net debt alone is $1,400m − $650m = $750m.

Step 3: back from enterprise value to equity value

Valuation work usually runs the bridge backwards. A DCF model or a peer multiple gives an enterprise value, and you need a value per share. Apply the peer median of 12.0x to EBITDA of $520m: implied EV $6,240m. Subtract debt and NCI, add back cash and associates: implied equity value $5,460m. Divide by the 125.0m diluted shares: $43.68 per share, 9.2% above the current price.

Worked example: both directions of the bridge

Yellow cells are inputs for one fictional listed software company (USD millions, shares in millions). Rows 2 to 8 build the diluted share count, rows 11 to 17 the bridge to enterprise value, rows 20 to 26 the way back from a peer multiple to a value per share.

Worked example: both directions of the bridge

	A	B
1	Diluted shares (treasury stock method)	Value
2	Share price ($)	40.00
3	Basic shares (m)	120.0
4	Options outstanding (m)	8.0
5	Average exercise price ($)	25.00
6	Restricted stock units (m)	2.0
7	Net new shares from options, TSM (m)	3.00
8	Diluted shares (m)	125.00
9
10	Equity value to enterprise value ($m)	$m
11	Equity value = price × diluted shares	5,000.0
12	+ Total debt	1,400.0
13	+ Non-controlling interests	120.0
14	− Cash and equivalents	650.0
15	− Investments in associates	90.0
16	Enterprise value	5,780.0
17	Net debt (debt − cash)	750.0
18
19	Enterprise value back to equity value	Value
20	LTM EBITDA ($m)	520.0
21	EV / EBITDA at today's price	11.12x
22	Peer median EV / EBITDA	12.00x
23	Implied enterprise value ($m)	6,240.0
24	Implied equity value ($m)	5,460.0
25	Implied value per diluted share ($)	43.68
26	Upside vs share price	9.2%
27
28	Mistake: EV with basic shares ($m)	5,580.0

Fictional company and illustrative figures. The company has no preferred stock and no pension deficit, otherwise they would be added like debt. Educational example, not investment advice.

Which items belong in the bridge

The rule is consistency. If a claim's cost is already deducted in the metric you value, leave it out of the bridge, and if it is not, include it. Interest is below EBITDA, so debt goes in. Rent is above EBITDA under old lease rules, so leases stay out of an old-style EV and EBITDA, but under IFRS 16 most of the rent moves below EBITDA, so lease liabilities go in. Use the balance sheet date closest to the share price date, and use the same definition for every company you compare, or the multiples will not be comparable. Excess cash is sometimes reduced by the cash a business needs to operate, and that is a judgement to state, not to hide.

Common mistakes

• Using basic shares. Ignoring 5.0m dilutive shares cuts equity value by $200m in the example, and EV with it, to $5,580m. The stock then looks cheaper than it is.
• Mixing numerators and denominators. EV belongs with revenue and EBITDA, equity value with net income. EV / net income or price / EBITDA mean nothing.
• Forgetting non-controlling interests. EBITDA includes 100% of partly owned subsidiaries, so the EV must include the minority share too.
• Inconsistent lease treatment. If EBITDA is after IFRS 16 or ASC 842, add lease liabilities to EV, and if you add them, use EBITDA before rent. Mixing the two inflates or deflates the multiple.
• Counting out-of-the-money options. Options with a strike above the share price add no shares under the treasury stock method.
• Ignoring the circularity in the reverse bridge. Dilution depends on the price you are solving for. Rerunning the treasury stock method at $43.68 adds about 0.4m shares and moves the value to about $43.54, so iterate once or twice when options are material.