Enterprise value (EV) is calculated as equity value plus financial liabilities minus financial assets. True or false?

Enterprise value (EV) is calculated as equity value plus financial liabilities minus financial assets. True or false?

• A. Equity value plus net debt minus cash
• B. Equity value plus financial liabilities minus financial assets
• C. EBITDA times multiple
• D. Net income plus depreciation

Answer: (B)

Understanding enterprise value begins with the idea that it represents the price to acquire the entire firm, including what it owes to creditors but removing what the firm holds in cash and other financial assets that could be used to pay down those obligations. In that light, adding the value available to equity holders (equity value) to the firm's financial obligations (financial liabilities) and then subtracting the financial assets (cash and other liquid assets) gives a complete picture of the net cost to take over the business. This is exactly what the statement expresses: EV = equity value plus financial liabilities minus financial assets. This matches the common intuition that cash can be used to pay down debt, effectively reducing the net amount a buyer would need to pay to acquire the company. In practice you’ll often see EV written as equity value plus net debt (where net debt = debt minus cash), but the broader formulation using financial liabilities minus financial assets conveys the same idea. For example, if market capitalization is 100, debt is 40, and cash is 10, then EV = 100 + 40 − 10 = 130, illustrating how the calculation reflects the total value to all capital providers after accounting for cash.

Understanding enterprise value begins with the idea that it represents the price to acquire the entire firm, including what it owes to creditors but removing what the firm holds in cash and other financial assets that could be used to pay down those obligations. In that light, adding the value available to equity holders (equity value) to the firm's financial obligations (financial liabilities) and then subtracting the financial assets (cash and other liquid assets) gives a complete picture of the net cost to take over the business. This is exactly what the statement expresses: EV = equity value plus financial liabilities minus financial assets.

This matches the common intuition that cash can be used to pay down debt, effectively reducing the net amount a buyer would need to pay to acquire the company. In practice you’ll often see EV written as equity value plus net debt (where net debt = debt minus cash), but the broader formulation using financial liabilities minus financial assets conveys the same idea.

For example, if market capitalization is 100, debt is 40, and cash is 10, then EV = 100 + 40 − 10 = 130, illustrating how the calculation reflects the total value to all capital providers after accounting for cash.