Walk me through the Enterprise Value bridge.
A core Valuation interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
EV = Equity Value + Net Debt + Minority Interest + Preferred Equity − Associates/Investments. Net Debt = total debt − cash. Start from market cap (share price × shares), add net debt and other claims senior to equity, subtract non-operating assets. EV reflects the value of the operating business independent of capital structure.
WHAT INTERVIEWERS LISTEN FOR
- ✓EV = Equity Value + Net Debt
- ✓Add minority interest and preferred equity
- ✓Subtract associates and investments
- ✓Net Debt = total debt minus cash
- ✓EV reflects operating business value
COMMON MISTAKES
- ✗Forgetting to subtract cash from debt
- ✗Including cash as an operating asset
- ✗Confusing EV with equity value
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RELATED QUESTIONS
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- How do you incorporate a company's excess cash and non-operating assets into a valuation?
- What is the correct treatment of minority interest in Enterprise Value and valuation multiples?
- A company has a market cap of $500M, total debt of $200M, cash of $50M, and 10 million shares outstanding. It also has 1 million in-the-money stock options with an exercise price of $20. The current stock price is $50. What is the diluted Enterprise Value?
- How do you treat an underfunded pension deficit in the EV-to-equity bridge, and what's the subtlety on tax?