Enterprise value (EV) is the value of the company as attributable to all providers of capital whereas the Equity Value is the value of the company as attributable only to the shareholders of the company.
Enterprise Value = Market Value of Equity + Market Value of Debt + Preferred Stock + Minority Interest – Cash
Equity Value = Fully Diluted Shares Outstanding x Share Price
- All the components are taken at market—not book—values. Some proponents argue that debt should be accounted for at book value. This is particularly relevant in liquidation analysis, since using absolute priority in a bankruptcy all securities senior to the equity have par claims. Generally, also, debt is less liquid than equity so that the “market price” may be significantly different from the price at which an entire debt issue could be purchased in the market. In valuing equities, this approach is more conservative.
- Cash is subtracted because when it is paid out as a dividend after purchase, it reduces the net cost to a potential purchaser. Therefore, the business was only worth the reduced amount to start with. The same effect is accomplished when the cash is used to pay down debt.
- Value of minority interest is added because it reflects the claim on assets consolidated into the firm in question.
- EV should also include such special components as unfunded pension liabilities, employee stock option, environmental provisions, abandonment provisions, and so on, for they also reflect claims on the company’s assets.
- EV can be negative in certain cases—for example, when there is more cash in the company than the value of the other components of EV.
- Equity value accounts for all the ownership interest in a firm including the value of unexercised stock options and securities convertible to equity.
- From a mergers and acquisitions academic perspective, equity value differs from market capitalization or market value in that it incorporates all equity interests in a firm whereas market capitalization or market value only reflects those common shares currently outstanding.