What is Enterprise Value?
Enterprise Value (EV) is the value of a company’s business operations. Enterprise Value is calculated as Equity Value plus Debt Outstanding minus Cash & Cash Equivalents minus Investments. It’s the price to buy the entire business as a whole and is a key valuation metric.
URL to download “PayPal Case Study Materials”: https://www.lumovest.com/paypal-case-study-materials-3/
Present Value of Future Cash Flow… Whaaa?
We’re sneaking in a small preview of the course to come. You don’t need to know what that phrase means for now. We’ll explain this concept in detail in the Intrinsic Valuation course!
Hi Anastasia,
When we’re starting with Equity Value (Market Capitalization) and we’re trying to calculate Enterprise Value, we should add debt and subtract cash.
Conceptually, Equity Value is the value of the entire company entitled by the shareholders. And the value of the entire company consists of the value of business operations (Enterprise Value) plus value of existing cash, plus value of investments leftover to equity holders after repaying the debt investors. So we add debt to Equity Value to calculate the Total Corporate Value, and then we subtract the value of existing cash and the value of investments, which leaves us the value of the business operations, aka Enterprise Value.
i dont understand why are we adding debt and subtracting an actual Cash and non-operating assets. shouldn’t it be the opposite?