Every valuation ends in a bridge. A DCF hands you an enterprise value and the client wants a share price, a comps table needs an EV over EBITDA for every peer, and a buyer wants to know what a business really costs once debt and cash are accounted for. Interviewers like this topic because it separates people who have memorised ‘EV equals equity plus debt minus cash’ from people who understand why each item sits where it does. This deck starts with a house and a mortgage, works through diluted shares, convertibles, preferred stock, non-controlling interest, IFRS 16 leases and pension deficits to a worked bridge that reconciles both ways, then finishes on the curveballs: negative EV, mismatched multiples, and a comps peer valued on the wrong share count.
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Card 1 of 16
Start me at the very beginning. What is enterprise value, what is equity value, and who does each one belong to?
EV is the price of the whole business, equity value is the slice left for shareholders after the lenders.
Think of a house worth £400k with a £300k mortgage on it. The house price is the enterprise value: what the entire asset is worth, regardless of who financed it. Your equity is the £100k you would walk away with after the bank was repaid, and that is the equity value. A company works the same way: enterprise value is what the operating business is worth to everyone who funded it, lenders and shareholders together, while equity value is what belongs to the shareholders alone. If the house rises to £440k the whole gain lands on your £100k, which is why equity is the riskier, more volatile slice.
Card 2 of 16
Calder Foods’ shares are worth £500m in total, it owes £200m to lenders and has £100m sitting in the bank. Why is that £100m subtracted when you work out enterprise value, rather than added?
Cash is subtracted because a buyer gets it back on day one, so it lowers the real cost of the operations.
Imagine you buy every Calder share for £500m. You now own a company that owes £200m, which you must eventually repay, so your commitment is really £700m. But you also own the £100m in its bank account, and on day one you could pay it straight out to yourself or use it to clear part of the debt. Your net cost for the actual food business, the factories, brands and contracts, is 500 plus 200 minus 100, or £600m, and that is the enterprise value. Cash isn’t part of the operations that earn the profit, it is stored value that comes with the keys, so it lowers the price.
Card 3 of 16
An MD uses ‘market cap’ and ‘equity value’ in the same sentence as if they were interchangeable. Are they, and which one goes into a valuation?
Market cap uses today’s share count, equity value uses the diluted count with options and convertibles.
Market capitalisation is the share price multiplied by basic shares outstanding, the shares actually issued and held by investors today. Equity value, as bankers use it, is the share price multiplied by diluted shares: the basic count plus the extra shares that would appear if in-the-money options, restricted stock units and convertible bonds were turned into shares. Overton Digital at £10 with 100m basic shares has a £1,000m market cap, but with 6m net extra shares from its options its equity value is £1,060m. A buyer has to pay for those future shares too, so the diluted figure goes into the bridge and into any multiple.
Card 4 of 16
Overton Digital trades at £10 and has 100m basic shares plus 10m employee options with a £4 strike. Walk me through the treasury stock method and give me the diluted share count.
Assume in-the-money options are exercised, spend the cash on a buyback, and count only the net new shares.
An option is the right to buy a share at a fixed strike price, and it only matters when the strike is below the share price, so £4 against £10 is in the money. Assume all 10m are exercised: the company issues 10m new shares and receives 10m times £4, or £40m. The treasury stock method assumes that £40m buys back shares at the £10 market price, retiring 4m. Net dilution is 6m, so the diluted count is 106m and equity value is £1,060m. Options struck above the share price are ignored, and restricted stock units count in full because their strike is zero.
Card 5 of 16
Kestrel Components has a £100m convertible bond that converts into shares at £20 each. How do you handle it in the bridge, and does your answer change if the share price is £25 versus £15?
Share price above the conversion price means treat it as shares, below means treat it as debt, never both.
A convertible bond is debt that the holder can swap for a fixed number of shares, here £100m divided by £20, or 5m shares. Compare the conversion price with the share price. At £25 the bond is in the money, since converting gives shares worth £125m for £100m of face value, so assume it converts: add 5m shares to the diluted count and leave the £100m out of debt, otherwise you count one claim twice. At £15 nobody would convert, so it stays as £100m of debt and adds no shares. There is no buyback step, because the company receives no cash on conversion, it simply cancels the bond.
Card 6 of 16
Beyond plain debt, the bridge at your bank adds preferred stock and non-controlling interest. What are they, and why do they belong on the debt side of the line?
Any claim on the business ahead of or alongside the common shareholders is added to equity value to reach EV.
Preferred stock is a class of shares that receives a fixed dividend and is paid before ordinary shareholders if the company is wound up, so it behaves like debt with a claim ahead of the common equity, and it is added. Non-controlling interest arises when a company owns, say, 80% of a subsidiary: the accounts consolidate 100% of that subsidiary’s revenue and EBITDA, but the 20% owned by outsiders sits as a separate line in equity. Since the EBITDA you divide EV by includes the whole subsidiary, EV must include it too, so the outsiders’ 20% is added. The full bridge is equity plus all debt-like claims, minus cash-like assets.
Card 7 of 16
Northbay Logistics reports under IFRS and leases its whole fleet of trucks. Do the lease liabilities go into EV, and what does that decision have to do with EBITDA?
Put lease liabilities in EV only when the EBITDA you pair with it excludes rent, so both sides agree.
Since 2019, IFRS 16 puts almost every lease on the balance sheet as a lease liability, the present value of future rent, with a matching right-of-use asset. Rent expense is replaced by depreciation and interest, so reported EBITDA goes up. That liability is financing in all but name, a lessor has funded the trucks the way a bank would, so a post-IFRS 16 EBITDA must be paired with an EV that includes the leases. If you deduct rent to get a pre-IFRS 16 EBITDA, leave the leases out. US GAAP also puts operating leases on the balance sheet but keeps rent in operating costs, so US comps usually exclude them.
Card 8 of 16
Halverson Industries runs a final-salary pension scheme with £500m of promised payouts and £380m of assets set aside. Does that go in the bridge, and for how much?
A pension deficit is money owed to staff that future cash flows must fund, so add it like debt, net of tax.
A defined benefit scheme promises employees a set pension, and the company must make up any gap between what it promised and what the fund holds. That gap, £500m less £380m, or a £120m deficit, sits on the balance sheet as a liability under both IFRS and US GAAP, and it will be paid from the same cash flows that service the bank debt, so it is a debt-like claim and is added. Because top-up contributions are tax deductible, most banks add the deficit after tax: at 25%, £120m becomes £90m. Never add the gross £500m promise, because the £380m set aside already covers most of it.
Card 9 of 16
Alongside cash, Bramwell & Co. holds £80m of treasury bills, a 10% stake in a listed supplier, and £25m locked in escrow for a customer contract. Which of these come off in the bridge?
Subtract what a buyer could turn into cash on day one, and leave restricted cash in because it is locked.
The test is whether the item is non-operating and could be handed to the owner without harming the business. Treasury bills and other short-term investments are cash in all but name, sold within days, so they are subtracted. The 10% stake in the supplier is a non-operating investment: it earns no EBITDA in Bramwell’s accounts, so many banks subtract its market value too, and you should say which you did. The £25m in escrow is restricted cash: it is pledged to a contract and cannot be paid out, so it is not cash-like and stays in EV. Read the cash note before subtracting the headline figure.
Card 10 of 16
Northbay Logistics: share price £8, 150m diluted shares, £500m debt, £50m preferred, £30m NCI, £120m lease liabilities and £200m cash. Build the bridge to EV, then walk it back to a share price.
Add the debt-like claims, subtract the cash, and reverse every step to get from EV back to a price per share.
Equity value is 150m shares times £8, or £1,200m. Add the claims that rank ahead of or alongside shareholders: £500m debt, £50m preferred, £30m NCI and £120m leases, £700m in total, to reach £1,900m, then subtract the £200m cash to land on an enterprise value of £1,700m. Going the other way, which is what a DCF or a comps valuation needs, start with £1,700m, subtract the £700m of debt-like items, add back the £200m cash to get equity value of £1,200m, and divide by 150m diluted shares for £8. If the reverse leg doesn’t return your starting price, you dropped an item somewhere.
Card 11 of 16
Bramwell & Co. has an equity value of £300m, no debt and £350m of cash. Its EV comes out at minus £50m. Is that possible, and what is the market saying?
EV goes negative when cash exceeds equity value plus debt, so the market values the operations below zero.
It is arithmetically possible and it does happen: 300 plus 0 minus 350 is minus £50m. The market is saying the operating business is worth less than nothing, which usually means one of three things. The company is burning that cash and investors expect much of it to be lost before it reaches them, or the cash is trapped, in a foreign subsidiary or ring-fenced by a regulator, so it isn’t really cash-like, or the shares are simply mispriced, which is what a value investor would argue. Either way a negative EV makes EV/EBITDA meaningless, so you would drop that peer from a comps set.
Card 12 of 16
A first-year has built a comps table with EV divided by net income. Why is that wrong, and how do you decide which metrics pair with EV and which with equity value?
Pair EV with profit before interest and equity value with profit after interest, so both sides match.
Enterprise value belongs to everyone who funded the business, so it must sit over a metric that is also available to everyone: revenue, EBITDA, EBIT and unlevered free cash flow, all of which come before interest is paid to lenders. Equity value belongs only to shareholders, so it sits over what is left after interest: net income, book equity, dividends and levered free cash flow. EV over net income mixes the two and breaks in practice: if a company replaces equity with debt, EV is unchanged but net income falls because of the new interest, so the multiple jumps though the business hasn’t changed.
Card 13 of 16
Talbrook Industries does three things in one quarter: raises £100m by issuing new shares, pays a £50m dividend, and buys a rival for £300m in cash. Take each in turn: what happens to equity value and EV?
Cash moving between a company and its owners leaves EV alone, but buying a business adds its EV to yours.
The share issue brings in £100m of cash and creates £100m of new equity value, so cash and equity rise by the same amount and EV, equity plus net debt, is unchanged: nothing about the operating business moved. The dividend is the mirror image, cash down £50m and equity value down £50m, EV unchanged again. The acquisition is different. Talbrook swaps £300m of cash for a business worth £300m, so its equity value holds, but net debt rises by £300m and EV rises by £300m, because Talbrook now owns more operations. Paying in shares instead would lift equity value and EV by £300m each.
Card 14 of 16
Halstead Foods is worth £900m as a business, with £800m of equity value and £100m of net debt. It borrows £200m and uses all of it to buy back shares. What happens to each value, and why does the rule work that way?
EV tracks the operations, so any reshuffle of who funds them moves equity value without moving EV.
After the buyback, net debt is £300m and equity value is £600m, but the factories, brands and cash flows are exactly what they were, so EV stays at £900m. Equity value is a residual, EV minus the claims ahead of it, so it moves whenever value shifts between claimants: borrowing to buy back shares, paying a dividend, issuing shares, or simply piling up cash from a year of trading all change the equity slice without changing the size of the business. Only news about the operations, a lost contract or a new product, changes EV, and then equity value moves by the same pound amount.
Card 15 of 16
Ferrow Retail’s EV/EBITDA moved from 10.0x to 9.7x the year IFRS 16 came in, with no change in trading. Show me why the multiple moved when nothing real happened.
Capitalising leases adds rent back to EBITDA and a lease liability to EV, and the two rarely move in step.
Before IFRS 16, Ferrow had £100m of EBITDA after paying £40m of shop rent, and an EV of £1,000m, so 10.0x. Under IFRS 16 the rent leaves operating costs, so EBITDA rises to £140m, and a £360m lease liability, the present value of future rent, is added to EV, taking it to £1,360m and the multiple to 9.7x. It falls because the leases were capitalised at £360m over £40m, or 9x rent, while the business trades at 10x, so blending in a cheaper block lowers the average. The real damage comes from mixing bases: the new £140m EBITDA over the old £1,000m EV gives 7.1x, which flatters Ferrow badly.
Card 16 of 16
Reviewing a comps sheet at 11pm, you notice Corrigan Foods’ equity value is exactly £12 times its 200m basic shares, yet the filing shows 20m options struck at £6. What is wrong, and what does the fix do to its 10.0x EV/EBITDA?
Basic shares understate a peer’s equity value and EV, so its multiple and anything valued off it come out low.
The analyst used market cap, not diluted equity value, so the options were ignored. Run the treasury stock method: 20m options at £6 bring in £120m, which buys back 10m shares at £12, so net dilution is 10m and the diluted count is 210m. Equity value rises from £2,400m to £2,520m, and with £400m of net debt EV rises from £2,800m to £2,920m. Over £280m of EBITDA the multiple moves from 10.0x to 10.4x. It matters beyond one cell: if the sheet is used to value your client, a low peer multiple produces a low client valuation, and that error lands in the number an MD shows a board.
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