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What the interviewer is testing
Whether you know who each value belongs to, can walk the bridge between them, and can match each to the right metrics so multiples are consistent.
Answer framework
- Equity value: value of the shares to common shareholders, diluted shares outstanding times share price.
- Enterprise value: value of the core operating business to all capital providers, excluding non-operating assets such as excess cash.
- Bridge: equity value + debt + preferred stock + noncontrolling interests (+ other debt-like items) - cash and non-operating assets = enterprise value.
- Matching: EV with revenue, EBITDA, EBIT and unlevered FCF; equity value with net income, EPS and levered FCF.
Sample answer
Equity value is the value of the company's shares to common shareholders: diluted shares outstanding times the share price. Enterprise value is the value of the core operating business to all capital providers, including debt, preferred, noncontrolling interests and equity, excluding non-operating assets such as excess cash.
To bridge, start with equity value, add debt, preferred stock and noncontrolling interests, plus other debt-like items if relevant, such as unfunded pension obligations, and subtract cash and non-operating assets such as equity-method investments.
Use EV with metrics available to all capital providers, such as revenue, EBITDA, EBIT and unlevered FCF, and equity value with metrics after interest, such as net income, EPS and levered FCF.
Likely follow-ups
Common mistakes
- Pairing equity value with EBITDA, or EV with net income.
- Using basic instead of diluted shares for equity value.
- Forgetting preferred stock and noncontrolling interests in the bridge.
- Saying cash is added to get enterprise value; it is subtracted.
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Related questions
Based on questions #8, #9, #10 in the full question bank.