350  Moving from Enterprise Value to Value per Share
reported on the balance sheet below their principal value, at $181.2 million 
and $718.5 million, respectively.24
The first column in Exhibit 16.4 values Square’s equity using the fair value 
of convertible debt reported in the company’s 10-K. The second column pres-
ents the year-end closing price collected from the TRACE database. Compared 
with the book value reported on the balance sheet, the company’s convertible 
debt trades at a significant premium. For instance, the convertible debt due in 
2023 was valued by Square at $901.5 million in December 2018 versus $718.5 
million in book value.
The significant premium to book value can be traced to the value of the 
conversion feature. According to Square’s annual report, the bonds maturing in 
2022 are convertible at $22.95 per share.25 At this conversion price, $211.7 million 
in outstanding principal is convertible into 9.23 million shares. With Square’s 
stock trading at $56.09 in December 2018, the bonds can be converted into the 
equivalent of $517.5 million in equity. The bond trades at a market price ($523.2 
million), which is slightly higher than the bond’s conversion value ($517.5 mil-
lion), given the upside potential and downside protection the bond offers.
EXHIBIT 16.4  Square Convertible Debt, December 2018
$ million
Capital structure
Fair 
value1
Market 
price2
Black-
Scholes 
value3
Conversion 
value
Carrying 
value
Principal 
outstanding
Enterprise value
26,300.0
26,300.0
26,300.0
26,300.0
Convertible debt at 0.375% due 2022
(515.7)
(523.2)
(534.8)
–
181.2
211.7
Convertible debt at 0.5% due 2023
(901.5)
(899.2)
(917.9)
–
718.5
862.5
Convertible note hedge
230.9
230.9
230.9
–
Employee options
(1,543.8)
(1,543.8)
(1,543.8)
(1,543.8)
Equity value
23,570.0
23,564.8
23,534.5
24,756.2
Number of shares, millions
Number of nondiluted shares
419.7
419.7
419.7
419.7
New shares issued
–
–
–
20.3
Number of diluted shares
419.7
419.7
419.7
440.0
Value per share, $
56.1
56.1
56.0
56.3
1 Value of convertible bonds reported in 2018 10-K in note 5, “Fair Value of Financial Instruments,” under “Fair Value (Level 2).”
2 Market price reported by the FINRA TRACE database as of December 31, 2018.
3 Value estimated using Black-Scholes option-pricing model and company-disclosed inputs.
24 When a company issues convertible debt at a coupon rate below the yield on similar nonconvertible 
debt, it will be recorded on the balance sheet at a discount but may not trade at a discount. This is be-
cause the conversion feature has value. The value of the conversion feature, however, is not recorded 
as part of debt, but rather as shareholders’ equity. Since the book value of equity is not used in DCF 
valuation, this can lead to a significant underestimation of the convertible’s value. For more on the 
accounting related to convertible debt, see Accounting Principles Board (APB) 14-1, “Accounting for 
Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash 
Settlement).” Financial Accounting Standards Board, May 9, 2008, www.fasb.org.
25 Reported in Square’s 2018 annual report, note 12, “Indebtedness.”