EV Bridge

Question 1

How do you find Fully Diluted Shares Outstanding?

Answer 1

Basic Shares Outstanding + In the money options and warrants

Question 2

What is formula for Treasury Method?

Answer 2

Treasury Method (New Shares) = [(share price - strike price)/ share price]* # of options

Question 3

What is the difference between common stock and preferred stock?

Answer 3

Preffered stock have:
a) A guaranteed dividend
b) Seniority over common stock in case of bankruptcy

Question 4

What happens if a company with a $10bn EV issues $2bn debt and then:
a) pays a $2bn dividend?
b) invest in new project with $3bn NPV?

Answer 4

a) EV remains the same but Eqt Value goes down $2bn. Why? Because cash is non-operating item, it does not impact EV if it goes out.

b) EV increases by $3bn NPV + $2bn investment = $15bn

Question 5

Can a company have negative Equity Value?

Answer 5

No! You can’t have negative share price or negative # of shares outstanding.

It could be zero if value of assets is lower than liabilities

Question 6

How do you find market value of debt if not traded?

Answer 6

If current yield similar to when debt was issued –> Use book value as a proxy

If not –> take cash flow that debt contract has promised and discount them at right yield to find the market value

Question 7

If a company with a market cap of $80m issues $20m of new equity, what % of the company will new shareholders own?

Answer 7

20 / (80+20) = 20%
Old shareholders are diluted to 80%