Enterprise Value STEP 2

Let's now turn our attention to computing the enterprise values of the target and acquirer. To do so, we first need to calculate the number of fully diluted shares outstanding ("FDSO"). We start with the basic shares outstanding found in the last step and add to that the number of share equivalents calculated using the treasury method, which assumes that proceeds from the exercise of in-the-money ("ITM") options are used to repurchase shares at the current market price. Next, we add the number of shares that would result from the conversion of ITM convertible securities. Multiplying FDSO by the current share price gives equity value, to which we add net debt to yield enterprise value. In order to calculate the Let's first look at what we did with the options tables. See our section on computing enterprise value for further explanation of these steps.

Note that we have added three columns between the "Average Strike" and "Treasury Shares" columns in the options data tables. For now, do not concern yourself with these columns; we have included them here so that we can more easily compute FDSO for a range of transaction prices (i.e. the price per share paid by the acquirer to the target's shareholders) in a subsequent step.

Note the cells showing whether the convertible securities are in-the-money. Even though these cells read "no" or "yes", their underlying binary data (i.e. 0 or 1, respectively) can be used in calculations. To format binary cells in this manner, open the Format Cells dialog box (shortcut Alt>o>e) and enter the custom number format "yes";"ERROR";"no";"ERROR".