Data & spreadsheets · DCF Calculator
How Enterprise Value Becomes Equity Value: The Net Debt Bridge Explained
· How it works
dcf valuation cash-flow
A DCF of free cash flow to the firm gives enterprise value, which is not what shareholders own. This post explains the bridge through debt, cash and other claims to equity value, and where per-share maths goes wrong.
A DCF total compared directly with a share price — why enterprise value and equity value answer different questions
Comparing enterprise value directly with a share price compares the value of operations for all capital providers with one equity claim. The repository audit identified this as the original calculator’s critical error. The corrected engine first converts enterprise value to equity value, and only then divides by shares.
Who the cash flows belong to — how discounting free cash flow to the firm at WACC values all capital providers together
The projected cash flows are unlevered FCFF because they are measured before interest. Discounting them at WACC therefore values claims belonging to debt and equity together. Lenders have a prior claim on the operating value; shareholders own the residual after the financing bridge rather than the complete enterprise amount.
Subtracting debt and adding cash — the core bridge implemented by ToolAcre, and what remains outside it
ToolAcre computes net debt as total debt minus cash, then equity value as enterprise value minus net debt. Positive net debt reduces equity; net cash makes net debt negative, so subtracting it adds value. The tool does not model leases, preferred stock or minority interests separately, so any broader debt-like adjustment remains outside its two-field bridge.
Dividing by shares — basic versus diluted counts, and why options and convertibles matter
Per-share value divides equity value by the single diluted share count supplied. The calculator rejects zero or negative shares and requires consistent scales, but it does not model option schedules, converts or buybacks through time. A share count in millions belongs beside monetary inputs in millions so the scale cancels correctly.
Worked example — an invented present value taken through the bridge to an illustrative equity value and per-share figure
Suppose hypothetical enterprise value is 1,200, debt is 300, cash is 100 and diluted shares are 50, all consistently scaled. Net debt is 200, equity value is 1,000 and per-share value is 20. Dividing enterprise value directly would produce 24, overstating the residual by exactly net debt divided by shares.
Common mistakes — double-counting interest, netting the wrong cash balance and mixing book with market values
Common mistakes include subtracting interest in FCFF and then also using an after-tax debt cost in WACC, reversing the cash sign, or mixing book balances with a separately market-valued capital structure without explanation. The pure engine avoids the sign bug and reports negative equity honestly rather than clamping an insolvent hypothetical case to zero.
What this does not cover — debt-like claims and dilution schedules beyond the tool’s debt, cash and single share-count inputs
The outline claimed the bridge must be completed entirely by hand, but the shipped implementation includes total debt, cash and shares, returns net debt and equity value, and renders a numbered bridge. What it does not include are the additional claim categories or changing dilution that a detailed transaction model might require.
The DCF reaches equity value through its built-in net-debt bridge — how to audit each step
Audit the chain in order: present value of forecast plus present value of terminal equals enterprise value; debt minus cash equals net debt; enterprise value minus net debt equals equity value; equity divided by shares gives the modelled per-share figure. It is still an assumption-driven model, not a target price or recommendation.