Series 79 practice questionmediumEnterprise Value vs Equity Value
A company has outstanding in-the-money convertible bonds. To reconcile enterprise value to equity value, which adjustment is required?
- AAdd back the value of the conversion option
- BUse the if-converted method to adjust the share count and remove the associated debt✓ Correct answer
- CTreat the bonds as debt regardless of conversion features
- DIgnore the convertibles until maturity
Explanation
Why B — Use the if-converted method to adjust the share count and remove the associated debt
The if-converted method assumes conversion of in-the-money convertibles, increasing share count and eliminating the related debt. Neglecting this leads to miscalculation of both enterprise and equity values.
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