Essay on Enterprise Value

Submitted By jjwork100
Words: 308
Pages: 2

Enterprise value is the measure of a company’s value, incorporating equity, debt, and cash. It can be thought of as the theoretical takeover price of a company: what it would really cost to acquire a company.

The enterprise value is one of the most important metrics used in valuation, investing, portfolio analysis, and accounting. It is recommended that you review this segment fully before proceeding, as other articles will refer back to enterprise value many times.

As a measure of a company’s value enterprise value is often used as an alternative to market capitalization, which only encompasses the total value of equity. Enterprise value also considers a company’s debt and cash and is thus considered more comprehensive than valuation based solely on market capitalization.

Enterprise Value is calculated according to the equation:

Enterprise Value= Market Value of Equity
+ Debt
+ Preferred Shares + Minority Interest
-Cash (and Cash Equivalents)

The first step of the enterprise value calculation is figuring out the common equity of a company at market value (the first line shown above). This is known simply as “market cap” and for publicly traded companies is easily calculated by multiplying the share price by the number of shares outstanding.

Market Value of Equity= Price per share * Total number of outstanding shares

To then compute enterprise value, one would then add on debt, preferred shares, and minority interest to the company’s market…