Bridge Unfunded pensions
Why do you add unfunded pensions to the EqV to get to the EV? What is the reasoning? Why don't you add the whole pension liability amount, why only the unfounded portion?
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Based on the most helpful WSO content, here's what you need to know about unfunded pensions and their impact on Equity Value (EqV) and Enterprise Value (EV):
Unfunded Pensions and Enterprise Value (EV)
Unfunded Pension Liabilities: These are the shortfalls between the fair value of plan assets and the present value of defined benefit obligations (DBO). The formula is: [ \text{Unfunded Status} = \text{FV (Plan Assets)} - \text{PV (DBO)} ] This can be positive or negative.
Impact on EV: Unfunded pension liabilities are added to the EV because they represent a financial obligation that the company must meet. This is similar to how debt is treated in the EV calculation. The rationale is that EV aims to capture the total value of the company, including all its financial obligations.
Why Only the Unfunded Portion?
Defined Benefit Plan: Only the unfunded portion of the pension liability is added to EV because it represents the actual shortfall that needs to be covered. The funded portion is already backed by assets set aside for this purpose and does not represent an additional financial burden.
Defined Contribution Plan: This type of plan is not typically included in the EV calculation because the company pays pensions as they occur, and there is no long-term liability to account for.
Equity Value (EqV) and Pension Liabilities
Summary
This approach ensures that the EV reflects all financial obligations, providing a comprehensive view of the company's value to all investors.
Sources: Confusion over Equity Value and Enterprise Value, Net debt: The definite list, https://www.wallstreetoasis.com/forum/investment-banking/why-would-someone-look-at-ev-over-eqv?customgpt=1, https://www.wallstreetoasis.com/forum/investment-banking/advance-payments-and-valuation-of-a-firm?customgpt=1, Net debt: The definite list
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