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Series 79 practice questioneasyEnterprise Value vs Equity Value

Which of the following is the correct formula for enterprise value?

  1. AMarket capitalization + cash and cash equivalents - total debt
  2. BMarket capitalization - total debt + cash and cash equivalents
  3. CTotal assets - total liabilities
  4. DMarket capitalization + total debt - cash and cash equivalents✓ Correct answer
Explanation

Why D — Market capitalization + total debt - cash and cash equivalents

Enterprise value (EV) = Market capitalization + Total debt + Preferred stock + Minority interest - Cash and cash equivalents. In its simplified form, EV = Market cap + Debt - Cash. Enterprise value represents the total cost to acquire a business, as the acquirer must pay for the equity, assume the debt, but receives the target's cash. This makes EV a capital-structure-neutral measure of total firm value.

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