Equity Value & Enterprise Value - Calculation

Question 1

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?

Answer 1

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.

Question 2

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?

Answer 2

$1,000. In this case the options’ exercise price is above the current share price, so they have no dilutive effect.

Question 3

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?

Answer 3

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.

We do not use the Treasury Stock Method with convertibles because we do not pay the company anything to “convert” the convertibles – it just becomes an option automatically once the share price exceeds the conversion price.

Question 4

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?

Answer 4

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.

Question 5

This same company also has Cash of $10,000, Debt of $30,000, and Noncontrolling Interests of $15,000. What is its Enterprise Value?

Answer 5

You subtract the Cash, add the Debt, and then add Noncontrolling Interests:

Enterprise Value = $222,000 – $10,000 + $30,000 + $15,000 = $257,000.