How is enterprise value typically calculated?

Enterprise value (EV) is a measure used to value a company as a whole, encompassing not just the equity but also the company's debt and cash reserves. It is particularly important for understanding the total valuation from the perspective of all capital holders, including equity and debt holders.

The correct calculation for enterprise value is market capitalization (market cap), which reflects the total equity value of the company, adjusted by adding the company's debt and subtracting cash and cash equivalents. This method gives a clearer picture of what it would cost to acquire a company, as it accounts for all financial obligations (debt) while considering available resources (cash).

By taking market cap and adding debt, you acknowledge that any buyer of the company would also assume its debt responsibilities. Conversely, subtracting cash from this total reflects the liquidity available to offset some of the company's liabilities. Thus, the formula accurately captures the economic realities of acquiring a company and makes it easier to compare across different companies or assess the overall value effectively.

The incorrect alternatives fail to accurately account for the necessary summation and subtraction of debt and cash in relation to market cap, leading to misleading figures in the context of enterprise valuation.