Enterprise Value FormulaDefined along with Formula & How to Calculate
What is the Enterprise Value Formula?
Enterprise Value reflects the total value of a company and is referred to as the more comprehensive alternative to Equity Market Capitalization.
To compute for the Enterprise Value, the company needs to take the sum of the market capitalization, preferred stock, outstanding debt, and minority interest, and then deduct the cash and cash equivalents.
The Enterprise Value is essential especially when there is a potential takeover or merging of two or more companies.
As a formula, Enterprise Value can be shown as:
Enterprise Value = Market Capitalization + Preferred stock + Outstanding Debt + Minority Interest – Cash & Cash Equivalents
Where:
Market Capitalization = Current Price per Share x Outstanding Number of Paid-up Equity Shares
Preferred Stock = Par Value x Outstanding Number of Preference Shares
Outstanding Debt = Bank Loans + Corporate Bonds
Except for the current price per share, the rest of the information needed to compute for the Enterprise Value is available from the Balance Sheet.
Examples of Enterprise Value Formula
Suppose three companies – Company A, Company B, and Company C – are planning to merge and each of their Enterprise Value needs to be computed.
Here are the assumptions on the Share Price and Share Count for the three companies:
Share Price (Latest): $15
Shares Outstanding: 100,000
Market Capitalization = $15 x 100,000
Market Capitalization = $1,500,000
Additional information for each of the company are the following:
| Company A | Company B | Company C | |
| Preferred Stock | 300,000.00 | 175,000.00 | 325,000.00 |
| Total Outstanding Debt | 880,000.00 | 900,000.00 | 565,000.00 |
| Minority Interest | 0.00 | 200,000.00 | 250,000.00 |
| Cash & Cash Equivalent | 1,200,000.00 | 875,000.00 | 965,000.00 |
To compute for the Enterprise Value for Company A, B and C, the formula can be used.
Company A
Enterprise Value = $1,500,000 + $300,000 + $880,000 + $0 – $1,200,000
Enterprise Value = $1,480,000
Company B
Enterprise Value = $1,500,000 + $175,000 + $900,000 + $200,000 – $875,000
Enterprise Value = $1,900,000
Company C
Enterprise Value = $1,500,000 + $325,000 + $565,000 + $250,000 – $965,000
Enterprise Value = $1,675,000
Calculating Enterprise Value in Excel
Using Excel, the Enterprise Value can be computed by following the formula as a guide for the calculation.
Company A’s Equity Value is computed using the excel formula as shown below:
Relevance and Use
The importance of computing for the Enterprise Value is mainly focused on assessing the worth of the company should a possibility of takeover happen.
It does not only account for the value of the company’s equity but also takes into consideration the size of a company’s cash reserves and its debts.
When acquiring the total outstanding debt of the company, the cost of acquisition increases.
But deducting the cash and cash equivalents moderate the impact of taking into account the total debt.
The inclusion of total debt in the Enterprise Value computation allows investors to look at different companies with varying capital structures when deciding which one to acquire.
Computing for the Enterprise Value can also be used in comparing the returns of different businesses, thereby helping the acquirer to decide which business is a sound business decision to do.
FundsNet requires Contributors, Writers and Authors to use Primary Sources to source and cite their work. These Sources include White Papers, Government Information & Data, Original Reporting and Interviews from Industry Experts. Reputable Publishers are also sourced and cited where appropriate. Learn more about the standards we follow in producing Accurate, Unbiased and Researched Content in our editorial policy.
Harvard Business School Online "HOW TO VALUE A COMPANY: 6 METHODS AND EXAMPLES" Page 1 . February 23, 2022
NYU Stern "Financial Ratios and Measures" Page 1 . February 23, 2022