FREE WORKED EXAMPLE / INVESTMENT BANKING
The £500m valuation bridge.
A short introduction to the kind of thinking you'll practise in Investment Banking Fundamentals. The downloadable starter kit is coming soon.
THE QUESTION
A company is worth £500m. What do shareholders own?
Assume a fictional company's enterprise value is £500m, gross debt is £120m and excess cash is £40m. In a simplified valuation bridge, equity value is calculated as follows.
Enterprise value represents the value of operations to all capital providers. The bridge deducts debt and adds cash to arrive at value attributable to shareholders, before other debt-like and cash-like adjustments.
Why it matters
Confusing enterprise value and equity value can materially misstate what shareholders receive. Real deals also require careful treatment of leases, minority interests and other adjustments.
Try the question: what happens if debt increases by £30m?
Holding enterprise value and cash constant, simplified equity value falls to £390m. In practice, the context of the debt increase matters, including whether it generated additional cash or value.
CONTINUE LEARNING
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