Module II· EV-Equity BridgeIntermediate

Question

How do you treat pension obligations in the EV-Equity bridge?

Answer

Mechanics

Pension underfunding (DBO (Defined Benefit Obligation) − plan assets) is debt-like and is deducted from EV. Tax adjustment: gross underfunding × (1 − t), because a tax shield applies on unwind.

Deep diveShow more details

Example

DBO $200m − plan assets $100m = underfunding $100m. At t = 30% − after-tax = $70m deducted from EV. At a middle-market company with unfunded direct pension promises (classic): treat the full DBO as debt-like. Consistency with comps matters − if the comps are unfunded, apply the pension adjustment there too.

Pitch tip

'Underfunded pension $70m after-tax − an equity-value reduction of 5%, in line with the sector median.'

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