Submitted to:

Hashem M Khaiyyum (KHM)

Lecturer
Department of Finance and accounting
School of business
North South University

Prepared by:
Samin Yasar Chowdhury
ID: 1711811630
Sec:1
Enterprise Value

Enterprise value treats a company more like a commodity rather than a collection of assets. It asks the

question how much would it take to buy the whole company. This way of valuing a company is easier to

digest because the whole company was paid for by collection of people and loans. So if we take the sum

of those payments what we will get is the total value of the company, the enterprise value. In short,

enterprise value is the market value of the whole business. It tells us how much the company is worth

instead of how much the market thinks it's worth. The market’s opinion of the value of the company is

called the Market Capitalization of that company. Market capitalization describes what the market

participants think the value of the company is. Market capitalization tells us how much the shareholders

pay for the company at the current moment. But that is just one part of the overall value of a company. An

enterprise is not only funded by the shareholder, there is also debt involved. So in order to find out how

much money in total was paid for the company we need to add the amount of debt with the market

capitalization of the company. This gives us a more clear picture in terms of how much value a company

has in today’s market. But only accounting for the debt is not enough as companies sometimes have cash

reserves and they can easily pay off some of their debts with cash reserves. What is needed to calculate

enterprise value is net debt which is total debt subtracted by cash reserves. Enterprise value gives the real

picture of the value of the company as market capitalization leaves behind the accounting of debts in its

calculations. This is why enterprise value is exclusively in ratio formulas that are used to compare

companies based on various attributes.

Enterprise value is often compared to equity value as a way to value a company. Equity value is simply

the valuation of all the assets a company has in its possession. But assets are only owned by the

shareholders of the company. So equity value is what the company is worth to the equity investors. To
describe what a company is worth to all investors meaning shareholders and debtors enterprise value is

used. So this way of valuing a company gives a more clear understanding of what a company is actually

worth.

One other reason for using enterprise value as opposed to equity value is that equity value changes as the

capital structure of the company changes. On the other hand enterprise value remains the same.

In short Enterprise value is how much the assets of the company that it is composed of was paid for. Only

the monetary value it took for all the assets to come together in a company.