Enterprise value (EV) is an economic measure which reflects the market value of a whole business. It is a sum of claims of all the security-holders: debt holders, preferred shareholders, minority shareholders, common equity holders, and others. Enterprise value is one of the fundamental metrics used in business valuation, financial modelling, accounting, portfolio analysis, etc.

EV= Market value of Equity + Market value of Debt + Minority Interest at Market Value + Preferred Equity at Market Value – Cash & Cash Equivalent + Market Value of Non Operating Assets

"Enterprise Value is the overall value of any business which represents all stakeholders and often looked at while acquiring/ selling any business or making any strategic decision and is dependent on the Value of the company, its subsidiaries and the Value of surplus assets. All the above issues are relevant for working out EV."

Enterprise Value is the present value of the claims of all stake-holders against an Enterprise where an Enterprise is financed with debt and equity. If the company has no non-operating assets, firm value can be valued by estimating future free cash flows and discounting those cash flows with an appropriate rate of return (which may vary from year to year) that embodies the returns required by creditors and shareholders of the firm.

Since this is essentially the value of operations of the firm, if there is any non-operating assets, the value of such non-operating assets should be added separately to arrive at the firm value or enterprise value.

In short enterprise value is the value shared by all investors, unlike debt value or equity value, which are shared only by creditors or by equity-holders respectively.

Key Issues and challenges while calculating EV

  • Should only Cash or Excess Cash be deducted?
  • Should only Cash be deducted or even Cash and Cash equivalents?
  • Should Debt be taken at Market Value?
  • Treatment of Debt if taken at year end or for setting up a new Business?
  • Treatment of Loans & Advances given to subsidiary Company?

To read the full article, please go to 'Enterprise Value' article on our website www.corporatevaluations.in.

If you have any query on Business Valuation, feel free to contact:

Mr. Chander Sawhney
Vice President
Corporate Professionals
+911140622252, +919810557353,
:- chander@indiacp.com

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