Hi!
Apologies in advance for the noob question.
How do you treat/value convertibles (e.g. convertible preferred shares, convertible notes) in a DCF for a private company to derive price per share? The issue is that the fair value of the convertibles depends on the share price. Since it is a private company, there is no observable market price. How to solve this issue?
Thank you for your help!
| +152 | How to stop feeling like shit for not making it in IB? | 57 | 47m | |
| +114 | If Tik Tok is forced to sell, what banks do you think would be involved in the deal? | 56 | 9m | |
| +70 | Updated LA Banking Scene (2024) | 52 | 1h | |
| +38 | Ranking banks that went under | 20 | 5h | |
| +34 | Burnt Out M&A ASO | 18 | 3h | |
| +32 | A strategy for SA applicants late to the game like myself | 15 | 10h | |
| +29 | Relevance of A-Levels for U.K. London recruiting | 21 | 17h | |
| +26 | Series 79 Help / Tips to Pass The First Attempt | 11 | 2d | |
| +25 | Intern Ettiquette | 4 | 14h | |
| +23 | What are hours like at BBs in London? | 47 | 12h |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
Also interested - Rover-S I know you are immensely knowledgable in this area, do you have any insight?
If they are in the money (equity value / share > strike price) then stock. If not, then debt. There’ll be some circularity involved here which is ok.
So you would first calculate implied share price with the assumption that the hybrids are pure debt, then compare strike with the implied share price to decide if the hybrids are converted to equity?
Probably a dumb question but for a private company, what do you use for the value in the denominator of equity value / share?
How is strike/actual share price calculated in the hybrid’s docs?
I was just wondering as it may come up in an interview, it was more of a theoretical question. So you would base it on the documentation?
Just calculate EV, subtract financial net debt and see if the convertibles are ITM. If so: treat as equity (or create debt-like item).
Thanks so much for explaining! Got it.
Separate but related question: how would you go about treating convertibles when calculating a WACC?
Ea quibusdam sed magni molestias et. Est sunt dolor eaque ullam.
Aut aspernatur eos voluptate sequi qui sunt ea excepturi. Animi enim nesciunt est quos temporibus in. Porro quod voluptatibus non.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...