How are convertible bonds treated in the calculation of enterprise value if they are in-the-money?

Convertible bonds that are in-the-money present a scenario where they have market conversion value, meaning their conversion price is lower than the current market value of the underlying equity. Thus, they are likely to be converted into shares rather than retained as debt.

When calculating enterprise value, these bonds can create dilution for existing shareholders if converted into equity. Therefore, treating them as additional dilution from equity captures the potential increase in share count and aligns with the idea that their conversion would dilute ownership among current shareholders. This approach recognizes the conversion feature of the bonds, indicating future potential equity which must be accounted for in valuations like enterprise value.

This treatment emphasizes the importance of reflecting all potential claims on the company’s value and provides a more accurate representation of what the equity holders might expect in terms of dilution and value distribution following the conversion of these bonds.