BIWS Calculation Questions Flashcards
Let’s say a company has 100 shares outstanding, at a share price of $10.00
each. It also has 10 options outstanding at an exercise price of $5.00 each – what
is its Diluted Equity Value?
Its basic equity value is $1,000 (100 * $10 = $1,000). To calculate the dilutive effect
of the options, first you note that the options are all “in-the-money” – their
exercise price is less than the current share price.
When these options are exercised, 10 new shares get created – so the share count is now 110 rather than 100. However, that doesn’t tell the whole story. In order to exercise the options, we had to “pay” the company $5 for each option (the exercise price). As a result, it now has $50 in additional cash, which it uses to buy back 5 of the
new shares we created.
So the fully diluted share count is 105 and the Diluted Equity Value is $1,050.
Let’s say a company has 100 shares outstanding, at a share price of $10 each.
It also has 10 options outstanding at an exercise price of $15 each – what is its Diluted Equity Value?
$1,000. In this case the options’ exercise price is above the current share price, so they have no dilutive effect.
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 – by the
par value – $1,000 – to figure out how many individual bonds there are:
$10 million / $1,000 = 10,000 convertible bonds.
Next, we need to figure out how many shares this number represents. The
number of shares per bond is the par value divided by the conversion price:
$1,000 / $50 = 20 shares per bond.
So we have 200,000 new shares (20 * 10,000) created by the convertibles, giving us 1.2 million diluted shares outstanding.
Let’s say that a company has 10,000 shares outstanding and a current share price of $20.00. It also has 100 options outstanding at an exercise price of $10.00.
It also has 50 Restricted Stock Units (RSUs) outstanding.
Finally, it also has 100 convertible bonds outstanding, at a conversion price of
$10.00 and par value of $100.
What is its Diluted Equity Value?
First, let’s tackle the options outstanding: since they are in-the-money (exercise
price is lower than the share price), we assume that they get exercised and that
100 new shares get created.
The company receives 100 * $10.00, or $1,000, in proceeds. Its share price is $20.00
so it can repurchase 50 shares with these proceeds. Overall, there are 50
additional shares outstanding now (100 new shares – 50 repurchased).
The 50 RSUs get added as if they were common shares, so now there’s a total of
100 additional shares outstanding.
For the convertible bonds, the conversion price of $10.00 is below the company’s
current share price of $20.00, so conversion is allowed.
We divide the par value by the conversion price to see how many new shares per
bond get created:
$100 / $10.00 = 10 new shares per bond
Since there are 100 convertible bonds outstanding, we therefore get 1,000 new
shares (100 convertible bonds * 10 new shares per bond).
In total, there are 1,100 additional shares outstanding. The diluted share count is
therefore 11,100.
The Diluted Equity Value is 11,100 * $20.00, or $222,000.
A company has a diluted equity value of $222,000, Cash of $10,000, Debt of $30,000, and
Noncontrolling Interests of $15,000. What is its Enterprise Value?
Enterprise Value = $222,000 – $10,000 + $30,000 + $15,000 = $257,000.
