Components of Enterprise value Market capitalization So it makes sense to deduct it from the total amount you need to pay for the company. That cash can be used to repay some of the debt. Because whatever cash the company has, it’s yours once you take over the company. So that’s is added to the total cost of acquisition. Once you acquire the company, whatever debt the company has, is your responsibility, and would need to pay that off eventually. So if you want to take over the whole company, that’s what you need to buy first. And that is basically the total value of all the shareholder’s stakes in the company. It is calculated by multiplying the company’s stock price by the number of outstanding shares (shares that are available to the public to trade).
Market capitalization (also known as equity value) is the company’s perceived value by the stock market participants. This is is how you can calculate enterprise value –Įnterprise Value = (Market cap + debt) – cash
Meaning, it is the company’s market value, which you need to pay for acquiring it.Ī company’s enterprise value is seen as a comprehensive alternative to its market cap and is mostly used in Mergers and acquisitions, as it gives an estimate of how much the buying entity must pay to take over the company. Enterprise value is a better alternative to market cap since it considers both the debt and the cash on the company’s balance sheet. In its simplest form, enterprise value (EV) is the theoretical takeover price of a company.
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