Enterprise Value & Equity Value Case Study

What an Enterprise Value Case Tests in an Interview

Enterprise value and equity value are the two numbers every valuation conversation starts with. Interviewers use them to see whether you understand what a company is worth to everyone who funds it. A case on this topic checks that you can move between the two without losing track of which claims belong where, usually starting from a share price and a capital structure table.

Equity Value vs. Enterprise Value

Equity value is what the common shareholders own, calculated as the share price multiplied by diluted shares outstanding. Enterprise value is the value of the operating business to all of its capital providers, so it also counts debt, preferred stock, and minority interest, and removes cash and other assets that sit outside the business.

Enterprise Value = Diluted Equity Value + Debt + Preferred Stock + Minority Interest - Cash - Non-Core Investments

An acquirer who buys the whole company takes on its debt and receives its cash, which is why the bridge looks the way it does.

How Dilution Fits In

In-the-money options add shares to the count. The treasury stock method estimates how many by assuming the option holders exercise, and that the company uses the proceeds to buy back shares at the current price. Only the net new shares count toward dilution. Adding every option to the share count would overstate dilution, because the exercise proceeds have real value.

Common Mistakes

• Using basic shares when the company has in-the-money options, which understates equity value.
• Adding the full option count to the share count instead of applying the treasury stock method.
• Leaving preferred stock and minority interest out of the bridge. Both are claims on the business that sit alongside debt.
• Forgetting to subtract non-core investments. They generate no EBITDA, so their value does not belong in the operating business.
• Pairing the wrong value with the wrong metric. Enterprise value goes with revenue and EBITDA, which are measured before interest. Equity value goes with net income and earnings per share.

Interview Tips

State the formula before you plug in numbers, and lay the bridge out as a vertical list so you can explain each adjustment in a sentence. Expect follow-ups such as why cash is subtracted and which multiples use enterprise value. This Medium case follows Summit Widget Company, which trades at $18 per share with $140M of revenue and $28M of adjusted EBITDA. It asks you to build enterprise value, then use a selected multiple range to work back to an implied share price.

The medium version of this case adds several items that commonly appear in a real enterprise value bridge, including options, preferred stock, minority interest, and non-core investments.

These items make the analysis more involved than simply adding cash and subtracting debt.

In this case, Summit Widget Company is publicly traded at $18.00 per share with 12.0 million basic shares outstanding. The company also has 1.5 million options outstanding with a weighted average exercise price of $10.00.

Summit generated $140.0 million of revenue and $28.0 million of adjusted EBITDA in 2024. Its capital structure includes $95.0 million of debt, $12.0 million of preferred stock, $8.0 million of minority interest, $22.0 million of cash, and $15.0 million of non-core investments.

Our goal is to calculate Summit's diluted equity value and current enterprise value, determine the company's current valuation multiples, and then use a selected EV / Adjusted EBITDA range to calculate implied common equity value and share price.

1. Calculate Basic Equity Value

Start with Summit's basic equity value.

Basic equity value represents the market value of the company's common shares before accounting for dilution from options or other potentially dilutive securities.

Summit's current share price is $18.00 and it has 12.0 million basic shares outstanding.

Basic equity value is therefore calculated as 12.0 million shares × $18.00 per share = $216.0 million.

Summit's basic equity value is $216.0 million.

That gives us the value of the currently outstanding common shares, but we still need to account for the company's in-the-money options.

2. Calculate Incremental Diluted Shares Using the Treasury Stock Method

Summit has 1.5 million options outstanding with a weighted average exercise price of $10.00.

Because Summit's current share price of $18.00 is above the $10.00 exercise price, the options are in-the-money.

For this case, we use the treasury stock method to estimate the incremental shares created by those options.

The treasury stock method assumes the options are exercised and that the proceeds received by the company are used to repurchase shares at the current market price.

If all 1.5 million options are exercised at $10.00 per share, Summit would receive 1.5 million × $10.00 = $15.0 million of proceeds.

At the current $18.00 share price, those proceeds could theoretically repurchase approximately $15.0 million ÷ $18.00 = 0.8 million shares.

The incremental dilution is therefore approximately 1.5 million options - 0.8 million repurchased shares = 0.7 million incremental diluted shares.

The reason we do not simply add all 1.5 million options to the share count is that the exercise proceeds have value. The treasury stock method gives the company credit for the shares it could theoretically repurchase using those proceeds.

3. Calculate Diluted Shares Outstanding and Diluted Equity Value

Summit has 12.0 million basic shares outstanding and approximately 0.7 million incremental shares from its options.

Diluted shares outstanding are therefore approximately 12.0 million + 0.7 million = 12.7 million shares.

We can then calculate diluted equity value using the current $18.00 share price.

Diluted equity value is approximately 12.7 million shares × $18.00 per share = $228.0 million.

Summit's diluted equity value is therefore $228.0 million.

For enterprise value purposes, diluted equity value is the appropriate starting point because the analysis should reflect the economic impact of in-the-money dilutive securities.