The Enterprise Value of a firm is the total value of a firm. It takes into consideration not just the equity value of a company but also its total debt and cash & cash equivalents.
EV is often used for analysis in cases of takeover i.e., when another firm is planning to buyout the company.
The basic formula for calculating enterprise value is:
EV = Market Capitalization + Market Value of Debt – Cash and Equivalents
For example, here are the details for company A:
Total Debt: Rs. 200
Market Capitalization: Rs. 500 (Rs. 5 per share x 100 outstanding shares)
Cash: Rs. 50
If another firm is planning to buy out company A, they would calculate the Enterprise value as: 500 (Equity) + 200 (Debt) - 50 (Cash) = Rs. 650
Many investors consider EV to be a more accurate representation of a firm’s value and use it for a more comprehensive analysis of businesses.
No comments:
Post a Comment