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Option adjusted valuation of debt and equity claims

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This model illustrates how changes in enterprise value are shared between different claim holders and how th
depending on factors such as leverage and business risk or volatility. Not all of a change in enterprise value, or
between an observed market EV and an investor's target EV, accrues to the common shareholders. Three diffe
used to illustrate: debt, common equity shares and share warrants (call options on the equity).

The model uses an underlying option pricing methodology to price each of the claims. Both 'straight' debt and
option like characteristics. Equity investors benefit from the option to 'put' a distressed business onto debt ho
investors themselves short that same put. It is the change in the value of this put option, together with the ch
the warrants that determines how EV and changes in EV are shared. To learn more about the model, and its u
limitations select 'about this model' above.

This is an interactive model: All blue cells can be modified

Model inputs
Current enterprise value
Current market enterprise value 1,000 Book value of debt
Asset volatility 30% Debt interest rate (yield at issue)
Risk free interest rate 2.0% Average debt maturity

Target enterprise value

Target EV upside / (downside) 20% Exercise price (% of share price)
Amount (% of common equity)
Exercise period

Implied debt and equity values at current market EV

Common
Warrants equity
Value excluding the put option effect
Impact of the equity put option
Estimated fair value 0 443

Implied volatility of each claim 55%

Share of incremental changes in enterprise value 0% 81%

Debt and equity values at target EV

Common
Warrants equity
Values at target EV 0 611
Upside / downside - absolute 0 168
- percentage 0% 38%

Components of enterprise value Sharing of incremental cha

Debt Option component of equity Equity Warrants Debtholders Shareholders W
1,200 100%

90%
1,000
80%

70%
800
60%

600 50%

40%
400
30%

20%
200
10%

0 0%
0 110 220 330 440 550 660 770 880 990 1100121013201430 0 110 220 330 440 550 660 770 880 99

Enterprise value Enterprise value

Click here for more information about model data, methodology and assumptions

This model is for general information and education purposes only - see terms of use and disclsimer

© The Footnotes Analyst, 2024

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nd equity claims

erent claim holders and how this sharing varies

a change in enterprise value, or the difference
mmon shareholders. Three different claims are
on the equity).

claims. Both 'straight' debt and equity have

stressed business onto debt holders, with debt
ut option, together with the change in value of
ore about the model, and its use and

modified

Debt
600
st rate (yield at issue) 4.0%
bt maturity 7.0 years

Warrants
ce (% of share price) 70%
of common equity) 0.0%
8.0 years

Total
equity Debt EV
313 687
131 -131
 443 557 1,000

55% 10% 30%

81% 19% 100%

Total
equity Debt EV
611 589 1,200
168 32 200
38% 6% 20%

aring of incremental changes in EV

Debtholders Shareholders Warrant holders

20 330 440 550 660 770 880 990 1100 1210 1320 1430

Enterprise value

odology and assumptions

ee terms of use and disclsimer

Terms of use and disclaimer