EV-Equity Bridge Calculation

Question

Isn’t there a case of double counting regarding the convertible? If the convertible is not in the money, we treat it as a debt-like item and deduct the amount accordingly. However, since the convertible is in the money in this case, we do not make that deduction—meaning equity is already higher by the amount of the avoided deduction. Adding an additional equity amount on top of this would, in my view, result in double counting.

Answer 1

When a convertible bond is not in the money, it's unlikely the bondholders will convert to equity, so we treat the convertible as a debt-like item. So we deduct its value from Enterprise Value to arrive at Equity Value, because Enterprise Value typically includes all sources of capital (debt and equity), and we're isolating just the equity portion.

If the convertible is in the money, it is highly probable that bondholders will convert their debt into equity. We stop considering it as a debt-like item and also do not add its value to the Equity Value. Instead, we typically account for the dilutive effect of the potential conversion. This means we'd consider the increased number of shares outstanding if conversion were to occur, which would then be reflected in a higher share count for calculating diluted equity value, rather than adding a separate monetary amount in the Equity Value.

Answer 2

Hi there,

When a convertible bond is in the money, we assume it will convert into equity, so we don’t treat it like debt anymore. That means we’re not subtracting it from enterprise value like we would with debt — because the company isn’t going to pay it back in cash, it’s going to issue more shares instead.

Now, the key is this: when we don’t deduct the convertible as debt, we have to reflect that value somewhere else — and we do that by increasing the number of shares in the equity calculation. So the extra value shows up through dilution, not as a separate line item.

If someone skips both — they don’t deduct the debt and also don’t increase the share count — then yes, the value gets counted twice and that’s a mistake.

So, in your example, as long as you’re accounting for the dilution properly (more shares from the conversion), then there’s no double counting. You’re not deducting the debt, but you are baking its value into the equity by having more shares in the mix. It all balances out.

The confusion comes when people try to adjust both the EV bridge and the share count — or forget to adjust either. But you only do one or the other, not both.

Let me know if you want to walk through numbers — it’s easier to see in action.

Best,
Harrshit M Kansal, CFA, MBA