5. Enterprise Value
i. describe enterprise value multiples and their use in estimating equity value;
What is Enterprise Value (EV) and what is its formula?
- Enterprise value (EV) is total company value minus the value of cash and investments.
EV = MV of common stock + MV of preferred stock + MV of debt - cash and investments
What is the EV/EBITDA ratio?
- EV/EBITDA is an indication of company value, not equity value.
- Since EBITDA are distributed between all types of investors in a company (common shareholders, preferred shareholders, and creditors), they reflect the fundamental value of the company as a whole. Therefore, a multiple using total company value is logically most appropriate.