Enterprise Value (“EV”) is the value of the company as of today, the present. It is calculated as Market Capitalization plus debt, minority interests and preferred shares, minus total cash and cash equivalents.
Market Capitalization (“Market Cap”) is total market value of all of a company's outstanding shares (Outstanding Shares are stocks currently held by investors, including restricted shares owned by the company's officers and insiders, as well as those held by the public. Shares that have been repurchased by the company are not considered outstanding stock). Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share.
EV differs significantly from simple market capitalization in several ways, and many consider it to be a more accurate representation of a firm's value.To understand this consider a large multinational Chemical company acquiring another small chemical company. The acquirer will have to take the small company's debt and shall pocket its cash. The value of a firm's debt, for example, would need to be paid by the buyer when taking over a company, thus EV provides a much more accurate takeover valuation because it includes debt in its value calculation.
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