When you are asked to value a company for any reasons like merger, acquisition, buyout or simply a valuation, etc the Enterprise value of a company has a significant place which every analyst looks for.
More believe it that EV provides a much precise value of a company though it is more of a theoretical value. When a company buys another company, it takes over its’ Debts. This debt is lightened when the company receives the Cash of the acquired company. That is the reason why Cash and its equivalent are reduced in the Enterprise value. It shows the value to buy the company deducting the amount that would be received.
Hence the formula:
EV = Market Capitalization( total public share value) +Minority Interest+ Preference Shares +Debt – Cash and Cash equivalent
-D.V.P
24th September 2012
FinancialDoodle 