Module 31.4 LOS 31.n: Enterprise Value Calculation and EV ratios

Enterprise value is the total value of a company:

EV = market value of common stock + market value of preferred equity + market value of debt + minority interest – cash – short term investments              

Cash is subtracted as we are looking from an acquirer’s perspective. We can use enterprise value to create a ratio of the value of the overall company using the EV/EBITDA:

                      EV/EBITDA = enterprise value/EBITDA


EBITDA = recurring earnings from continuing operations + interest + taxes + depreciation + amortization

or for forecasting

= EBIT + depreciation + amortization

The EV/EBITDA ratio is useful in negative EPS situations, as well as for value firms with different leverage levels or valuing capital-intensive firms. However, EBITDA can overstate CFO if working capital is growing and does not account for capital expense as well as FCFF measures.

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