What formula represents Enterprise Value (EV)?

Enterprise Value (EV) is a comprehensive measure used to assess the total value of a business. It reflects what it would cost to acquire the entire company, considering both its equity and debt obligations and subtracting cash and cash equivalents since those can be used to pay down debt in an acquisition.

The correct formula for calculating Enterprise Value is Market Capitalization plus Total Debt minus Cash. This captures the full value of a company by accounting for its equity value (Market Cap) and total outstanding debt while removing the cash on hand, which decreases the net cost to acquire the firm.

If we break it down:

• Market Capitalization represents the total equity value of the company's shares in the market.

• Total Debt includes all outstanding debts and obligations the company has.

• Cash is deducted because, in an acquisition, the acquirer can use that cash to offset the cost of the debt, thereby reducing the effective purchase price.

The options that deviate from this formula misrepresent the relationship between these variables, which is crucial for accurately calculating Enterprise Value. Understanding how to correctly calculate EV is essential in finance, especially for evaluating merger and acquisition opportunities, as well as for valuation purposes in various analyses.