Enterprise value - Wikipedia, the free encyclopedia Page 1 of 2

Enterprise value
From Wikipedia, the free encyclopedia

Enterprise value (EV), Total enterprise value (TEV), or Firm value (FV) is a market value measure of a company from the point of view
of the aggregate of all the financing sources; debtholders, preferred shareholders, minority shareholders and common equity holders. Because
EV is a capital structure-neutral metric, it is useful when comparing companies with diverse capital structures.

Enterprise value =
common equity at equity value
+ debt at market value
+ minority interest at market value, if any
+ preferred equity at market value
- cash and cash-equivalents.

Cash is subtracted because when it is paid out as a dividend, it reduces the net cost to the 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.

Metrics using EV

EBITDA is the measure of cash returns that accrue to all the shareholders in aggregate. The corresponding measure of income would be Net
Income with the after-tax cost of interest backed out.

„ EV/EBITDA is the metric most used to measure how many years it would take to payback the investment. This metric is equivalent to
the payback period used by debtholders (Debt/EBITDA). The P/E metric used by shareholders is similar except it measures earnings,
not cash flow.
„ EBITDA/EV is the metric most used to measure the cash rate of return on the investment.

Usage

Stock market investors use EBITDA/EV to compare returns between equivalent companies on a risk adjusted basis. They can then super-
impose their own choice of personal debt levels. In practice, stock investors cannot use EV because they have no access to the market values
of the company debt. It is not sufficient to substitute the book value of the debt because a) the market interest rates may have changed, and b)
the market's perception of the risk of the loan may have changed since the debt was issued. Remember, the point of EV is to neutralize the
different risks, and costs of different capital structures.

http://en.wikipedia.org/wiki/Enterprise_value 4/11/2007
Enterprise value - Wikipedia, the free encyclopedia Page 2 of 2

Buyers of controlling interests in a business use EV to compare returns between businesses, as above. They also use the EV valuation to
determine how much to pay for the whole entity (not just the equity). They may want to change the capital structure once in control.

External links
„ Investopedia: Enterprise Value (http://www.investopedia.com/terms/e/enterprisevalue.asp)

Retrieved from "http://en.wikipedia.org/wiki/Enterprise_value"

Categories: Mathematical finance | Fundamental analysis | Economics and finance stubs

„ This page was last modified 21:04, 22 March 2007.

„ All text is available under the terms of the GNU Free Documentation License. (See Copyrights for
details.)
Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc., a US-registered 501(c)(3)
tax-deductible nonprofit charity.

http://en.wikipedia.org/wiki/Enterprise_value 4/11/2007