Enterprise value is sum of market cap and Debt minus the cash and cash equivalent. Take a simple example;
A company has 10 shares outstanding and each share is trading at 10 Rs. The market cap will be 10*10 = 100. Let's suppose that the company has just taken debt of 50 Rs. Out of this Rs 50, the company has spent Rs 25 in purchasing some machine and the remaining Rs. 25 is locked in a shelf in the company premise. How much someone should pay to buy the company.
The price will be market cap + debt = 150 Rs. Now when you get the company, you have a shelf that has Rs 25 cash. You can take this money as the company is yours now. essentially you paid Rs 125 to buy the company.
Joined: 29/Dec/2007
Location: India
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Posts: 1283
Posted: 25/Sep/2010 at 3:47pm
It is said that EV is better measure on what one needs to pay to determine a firms value. There are many cases of listed stocks that have Mcap which is less than the EV.
What would that effectively mean for a buyer or a seller to determine undervlauation or fair value or overvaluation.
Remember the debt component while arriving at your decision
Joined: 19/Mar/2010
Location: India
Online Status: Offline
Posts: 299
Posted: 15/Apr/2011 at 11:41am
Hello I just had a few queries regarding the calculation of Enterprise Value??
1)Should Account Payables, Contingent Liabilities be added to enterprise value??? Especially for companies that are heavy on working capital, have many subsidiaries or should we only take things like debt not considered good and recoverable???
2)While taking this and getting EV/EBIDTA ratio should we take EBIDTA after tax, or free or tax.
3)Should depreciation only be added to EBIDTA if capacity utilization is peaking or should be added anyways??
Would appreciate answers to the same . Thanks very much again.
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