What is Enterprise Value
What is Enterprise Value and How to calculate it?
Enterprise Value represents the true value of the company. It is total value of debt & equity. It is true cost of acquiring the company which will include both debt value & equity.
To understand Enterprise Value, let’s consider buying a house.
Suppose you want to buy a house and you pay INR 100 to the owner of the house as price then INR 100 is the equity value of the house but there is loan on that house of INR 500. Now as you are the new owner of the house, so you will have to pay that loan of 500 also. Now consider that there is new branded AC in that house which is a Free Gift to you. Now you can sell this AC in market for INR 40.
So this way the true cost of buying that house is not 100 which is only the equity value but 560 (100 Equity + 500 Debt -40 AC Price) which is the real burden (True Cost) of buying the house.
You can apply this concept to the Company also.
Enterprise value will include the value of equity and net debt (Total Debt – Cash)
Enterprise Value can be calculated in two ways.
- DCF valuation method which is based on fundamentals of company
- Market price which is a market factor
Let’s look at the formula for Enterprise Value:
Enterprise value is the theoretical price an acquirer might pay for another firm, and is useful in comparing firms with different capital structures since the value of a firm is unaffected by its choice of capital structure.
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