Calculating Enterprise Value

It doesn't. The expression is a bit of a misnomer.

Enterprise value is NOT the value of the enterprise.

Enterprise value is the amount that it will cost a raider to takeover the company.

That is why debt is added in, because, after you buy all the shares and become the owner, the debt is now your problem, and therefore represents an acquisition cost to you.

Conversely, the cash and cash equivalents (investments) are now yours to line your pockets with.

So, the total out-of-pocket cost to acquire the company will be the cost of the shares plus the debt, defrayed by the lovely cash in the bank, and investments.

It's all current. You wouldn't expect to be able to takeover Microsoft at 7 cents a share, would you?

I totally understand what you mean! Thanks for this brilliant explanation!

Isn't it surprising and interesting that the enterprise value of a company can be defrayed by the amount of cash the target company has? For example: ABC has a market cap of $1B, and $400M in debt (outstanding bonds), and finally, they have (for example) $1.39999999999B in cash. The enterprise value here is exactly $1.00!

After you bought all the stocks/bonds of ABC for $1.4B, then this cost is offset by ABC's cash position.

Of course, in my example, *NO* companies with ~$1.4B in cash would have a market cap of $1B.

Opinions/Comments?

Thanks, didn't know that and never bothered to understand what it meant.

So >Enterprise value is NOT the value of the enterprise.