3.5.2. Enterprise Value and Related Multiples
Enterprise value—as well as the multiples derived from it—are among the most important and widely used measures of a company’s absolute and relative value. Enterprise value (EV) is a more comprehensive representation of value than equity value, because EV includes a company’s cash, debt, and preferred stock, in addition to equity value. Enterprise value is often referred to as the “takeover value” of a company. Since an acquirer of a company buys that company’s cash and debt, EV is a more realistic measure of market value.
Enterprise value is given by the formula:
enterprise value = equity value + market value of preferred shares + net debt + non-controlling interests
One of the components of EV will only apply if the company is a subsidiary of another company: non-controlling interests. A non-controlling interest is any equity in a subsidiary held by a party other than the parent company.
Another thing to note is that if the treasury stock method dictated that any convertible preferred shares be counted as common shares in the calculation of equity value, then those preferred shares should be excluded from “market value of preferred shares.”
SAMPLE QUESTION
A company has a market cap of 56 million shares outstanding trading at $10 per share. The company has total debt of $320 million and cash and cash equivalents of $41 million. Assuming no in-the-money options or convertibles, what is the company’s enterprise value?
Answer: $839 million. Enterprise value is the market value of equity plus net debt. Market value of equity is essentially the same as market cap: shares outstanding multiplied by current market price. Here, the market value of equity is $560 million (56 million × $10). Net debt is total debt less cash and cash equivalents. In this case, net debt is $279 million (320 – 41).
The enterprise value is $560 million plus $279