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Valuation Workbook: Step-by-Step Exercises and Tests to Help You Master Valuation, 5th Edition by McKinsey & Company

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12

Moving from Enterprise Value to Value per Share

Enterprise value is the value of the entire company, which equals the sum of core operations plus nonoperating assets. Subtracting debt, debt equivalents, and hybrid securities, and making other adjustments, provides an estimate of the value of equity. The value of equity divided by undiluted shares outstanding gives value per share. The process should avoid double counting and include valuations of interdependencies between the value of core operations and the value of nonoperating dependencies.

The valuation must carefully evaluate the nonoperating assets, which consist of excess cash and marketable securities, nonconsolidated subsidiaries and equity investments, loans to other companies, finance subsidiaries, discontinued operations, excess real estate, tax loss carry-forwards, and excess pension assets. Debt and debt equivalents consist of debt of all kinds (for example, bonds, bank loans, and commercial paper); operating leases; securitized receivables; unfunded pension liabilities; contingent liabilities; and operating and nonoperating provisions. Hybrid securities consist of convertible debt and convertible preferred stock. Employee stock options and minority interests require additional adjustments.

1. Which of the following is not a method for evaluating convertible debt?

A. Market value.

B. Multiples valuation.

C. Black-Scholes valuation.

D. Conversion price valuation.

2. An analyst is applying an integrated-scenario ...

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