Enterprise Value Formula

Article byWallstreetmojo Team
Edited byAnkush Jain
Reviewed byDheeraj Vaidya, CFA, FRM

Enterprise Value Formula is an economic measure that reflects the business’s entire value, including the secured and unsecured creditors and the equity and preference shareholders of the company. It is more often used in acquiring other businesses or merging two or more companies to generate synergy.

What is Enterprise Value Formula?

The enterprise value of a companyEnterprise Value Of A CompanyEnterprise value (EV) is the corporate valuation of a company, determined by using market capitalization and total debt.read more can be ideally defined as an amount that represents the entire cost of the company in case some investor intends to acquire 100% of it. The formula for enterprise value is calculated by adding the company market capitalization Market CapitalizationMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share.read more, preferred stockPreferred StockA preferred share is a share that enjoys priority in receiving dividends compared to common stock. The dividend rate can be fixed or floating depending upon the terms of the issue. Also, preferred stockholders generally do not enjoy voting rights. However, their claims are discharged before the shares of common stockholders at the time of liquidation.read more, outstanding debt, and minority interestMinority InterestMinority interest is the investors' stakeholding that is less than 50% of the existing shares or the voting rights in the company. The minority shareholders do not have control over the company through their voting rights, thereby having a meagre role in the corporate decision-making.read more together, and then deducting the cash and cash equivalentsCash And Cash EquivalentsCash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation.  Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. read more obtained from the balance sheet. The cash and cash equivalents are deducted from the enterprise value since the post-acquisition of the complete ownership of the company; the cash balance belongs to the new owner. Mathematically, it is represented as,

Enterprise value Formula = Market Capitalization + Preferred stock + Outstanding Debt + Minority Interest – Cash & Cash Equivalents

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Source: Enterprise Value Formula (wallstreetmojo.com)

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Step by Step Application of Enterprise Value Formula

The Calculation of Enterprise Value equation can be done in the following six simple steps:

  1. Firstly, the current price per share of the company has to be found out from the stock market, and then the number of paid-up equity shares has to be collected from the balance sheet. Now, the current market capitalization of the stock can be derived by multiplying the current price per share with the great number of paid-up equity shares.

    Market Capitalization = Current Price Per Share x Outstanding Number of Paid-up Equity Shares

  2. Now, the current value of the preferred stock is computed by multiplying the stock’s per value by the number of outstanding preference shares, which are both available on the balance sheet.

    Preferred Stock = Par Value x Outstanding Number of Preference Shares

  3. The current outstanding debt balance is calculated by adding financial liabilities like bank loans and corporate bonds, again available on the balance sheet.

    Outstanding Debt = Bank Loans + Corporate Bonds

  4. Now, the minority interest is captured, as reported in the balance sheet.

  5. The cash and cash equivalents are computed by adding the cash balance and fixed deposits and current account deposits with banks, which are again mentioned in the balance sheet under the current asset section.

    Cash and Cash Equivalents = Cash Balance + Fixed Deposits and Current Account Deposits with Banks

  6. Finally, the enterprise value is arrived at by adding the values derived in Step1-4 and deducting the value in Step 5 as shown below,

    Enterprise Value = Market Capitalization + Preferred Stock + Outstanding Debt + Minority Interest – Cash and Cash Equivalents

Explanation Video of Enterprise Value

 

Examples of Enterprise Value Formula

Let’s take a few simple to advanced examples to understand Enterprise Value.

You can download this Enterprise Value Formula Excel Template here – Enterprise Value Formula Excel Template

Example #1

Let us assume that a company ABC Limited has the following financial information:

Therefore, given

  • Market capitalization = 2,000,000 * $3 = $6,000,000
  • Preferred stock = $0
  • Outstanding debt = $3,000,000
  • Minority interest = $0
  • Cash and cash equivalents = $1,000,000

Based on the above formula, the calculation of the enterprise value of ABC Limited can be as follows:

  • EV Formula = Market capitalization + Preferred stock + Outstanding debt + Minority interest – Cash and cash equivalents
  • Enterprise value = $6,000,000 + $0 + $3,000,000 + $0 – $1,000,000
  • Enterprise value = $8,000,000 or $8 million

Example #2

Let us take the real-life example of Apple Inc.’s annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more as on September 29, 2018. The following information is available:

Given

  • Market capitalization (millions) = 4,754.99 * $225.74 = $1,073,391
  • Preferred stock = $0
  • Outstanding debt (millions) = $11,964 + $102,519 = $114,483
  • Minority interest = $0
  • Cash and cash equivalents (millions) = $25,913

Based on the above formula, the calculation of the enterprise value of Apple Inc. can be as follows:

  • EV Formula = Market capitalization + Preferred stock + Outstanding debt + Minority interest – Cash and cash equivalents
  • Enterprise value Apple Inc. (millions) = $1,073,391 + $0 + $114,483 + $0 – $25,913
  • Enterprise value Apple Inc. (millions) = $1,161,961
  • Therefore, Apple Inc.’s enterprise value as on September 29, 2018, stood at around $1,161.96 billion or 1.16 trillion.

Enterprise Value Calculator

You can use the following Enterprise Value Calculator.

Market Capitalization
Preferred Stock
Outstanding Debt
Minority Interest
Cash and Cash Equivalents
Enterprise Value Formula =
 

Enterprise Value Formula = Market Capitalization + Preferred Stock + Outstanding Debt + Minority Interest - Cash and Cash Equivalents
0 + 0 + 0 + 0 - 0 = 0

Relevance and Use

The importance of enterprise value revolves around the fact that it helps assess the worth of a company. Further, the enterprise value can also be seen as the theoretical takeover price of a company to be acquired. It accounts for the impact of the outstanding debt and the cash balance that the acquirer also takes over during the transaction. However, the acquisition of the outstanding debt increases the cost of acquisition, the acquisition of the available cash balance moderates the acquisition cost to some extent.

Given that the debt portion is included in enterprise value, it enables the comparison of companies with different capital structures, which eventually helps in acquisition. In addition, the acquirer can use enterprise value to compare returns from different businesses in which they intend to buy controlling stakes.

Calculate Enterprise Value in Excel

Let us take the case of Apple Inc. mentioned in EV Formula Example #2 to demonstrate in an excel template the working towards the calculation of the Enterprise Value:

In the below template is the data of Apple Inc for September 2018 to calculate its Enterprise Value.

enterprise Value Excel Example1

In the below given excel template, we have used the calculation of Enterprise Value to find Apple Inc.’s Enterprise Value.

Enterprise Value Excel Example1.1

So the Calculation of Enterprise Value will be:-

Enterprise Value Excel Example1.2

Recommended Articles:

This article is a guide to Enterprise Value Formula. Here we discuss its uses and simple to advanced practical examples to understand Enterprise Value. We also provide you with Enterprise Value Formula Calculator with a downloadable excel template. You can learn more about Excel Modeling from the following articles –

Reader Interactions

Comments

  1. Sudipto Roy says

    Good example

  2. Nigussie says

    Your example to clarify the meaning of EV is good.I am very happy about your lesson.thank you

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