Enterprise value = 50. Net debt = 60. What is equity value? What does that mean?

Equity value is 50 minus 60, which equals negative 10, meaning the company's debt exceeds the value of its operations, leaving nothing for equity holders—the firm is effectively insolvent on a market-value basis.

Intuition

Enterprise value represents what the entire business is worth to all capital providers. Net debt represents the senior claim that must be paid before equity holders receive anything. When the senior claim exceeds the total pie, there is nothing left for equity — equity value goes negative, signaling the company owes more than it's worth.

Watch

In reality, equity value (market cap) cannot go below zero because of limited liability — shareholders can simply walk away. A negative implied equity value signals distress or potential bankruptcy, but the stock price floors at zero. Interviewers may test whether you understand this distinction between theoretical and observed equity value.

Deep Dive

Calculate equity value given enterprise value and net debt, and interpret the result when equity value is negative.

Core Formula:

Step 1: Plug in the numbers

Step 2: Interpret

Equity value is negative 10. This means the company's debt exceeds the total value of its operations. The claims of debt holders are worth more than the entire business — there is nothing left for equity holders.

In practice, this means:

  1. The company is technically insolvent on a market-value basis — its assets (as valued by the market at EV = 50) cannot fully cover its net debt obligations of 60.
  2. Equity holders are underwater — their shares are theoretically worth zero (equity cannot trade below zero in a limited-liability structure).
  3. The company is a candidate for restructuring, distressed sale, or bankruptcy, where debt holders would likely take control and equity gets wiped out or severely diluted.

Key nuance: In reality, publicly traded equity can still trade above zero even when this math implies negative equity value, because equity behaves like a call option on the firm's assets — shareholders retain upside optionality if the business recovers, while their downside is capped at zero. But from a fundamental valuation standpoint, equity value here is -10.

Can you answer this IB interview question? | OFFERGOBLIN