Question

You are valuing a company using probability-weighted scenario analysis.
You carefully model three scenarios, such that the resulting enterprise value equals $300 million in Scenario 1, $200 million in Scenario 2, and $100 million in Scenario 3. The probability of each scenario is 25 percent, 50 percent, and 25 percent respectively. What is the expected enterprise value? What is the expected equity value? Management announces a new plan that eliminates the downside scenario, making Scenario 2 that much more likely. What happens to enterprise value and equity value? Why does enterprise value rise more than equity value?


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  • CreatedAugust 12, 2015
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