DCF DCF Equity Value and Enterprise Value 2

Question 1

What is included in 'net debt' when bridging from EV to equity value in a DCF?

Accepted Answer

Total debt plus preferred stock and minority interest, minus cash and equivalents

Answer

A complete net debt bridge includes total debt, preferred stock, and minority interest as debt-like items, minus cash and cash equivalents.

Question 2

If a DCF model yields an equity value of $800M and the company has 40M diluted shares outstanding, what is the implied share price?

Accepted Answer

$20.00

Answer

Implied share price = equity value / diluted shares = $800M / 40M = $20.00 per share.

Question 3

Why should diluted shares (not basic shares) be used when calculating implied share price in a DCF?

Accepted Answer

Diluted shares include options and warrants that will create additional shares if exercised, diluting existing shareholders

Answer

Diluted shares include all potential shares from options, warrants, and convertibles, providing a more conservative and accurate per-share valuation.

Question 4

A company with EV of $1B has $200M in cash, $300M in debt, and $50M in preferred stock. What is the equity value?

Accepted Answer

$850M

Answer

Equity value = EV – debt – preferred stock + cash = $1,000M – $300M – $50M + $200M = $850M.

Question 5

What does it mean if a company's DCF-implied equity value is negative?

Accepted Answer

The company's net debt exceeds its enterprise value, meaning it is technically insolvent on a DCF basis

Answer

A negative equity value means the present value of the business is less than the net debt burden, implying the equity is worth zero and the company is over-leveraged.

DCF - Discounted Cash Flow Practice Test

DCF - Discounted Cash Flow Practice Test

DCF DCF Equity Value and Enterprise Value 2