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The concept of Enterprise value has become one of the key aspects of business valuation these days instead of equity market capitalisation. Enterprise value serves as a foundation for mergers and acquisition deals taking place these days. There are several reasons why enterprises are looking for EV over other forms of valuation. To understand the concept of EV, one has to delve deeper into concept.
This piece of writing discusses the concept of Enterprise Value and its importance for a business.
In simple words, enterprise value[1] is the financial metric for calculating a company’s total value, including both equity and debt holdings. EV represents the entire market value instead the equity value. For instance, let’s consider a house on mortgage. The Enterprise value of the house is the market value of the house as a whole, while the market capitalisation of the house would be the sum of the outstanding mortgage and its value.
The key constituents of Enterprise value are as follows:
There are two formulae for determining the EV of a company. These are as follows:
EV= Market Cap. + Market Value of Debt – Cash and Equivalents; OR
EV= Common shares + Preferred Shares + Market Value of Debt + Minority Interest – Cash and Equivalents
Market Cap = No. of outstanding shares * Current stock price + Company’s debts (both long-term and short-term debts)
The importance of the concept of Enterprise value has been discussed as follows:
To conclude the above mentioned literature, it must be kept in mind that calculating the enterprise value is just as important as finding out the company’s equity capital because it allows the promoters to determine the amount of money they will make after selling it settling its debts.
Read our Article: Methods of Business Valuation in India
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