This concept undertakes the total value of an entity instead of just equity value. We can calculate the total value of a firm by totaling the market value of assets. But, finding the market value of all the assets could be a complex method. Instead, one can calculate the total value using the enterprise value calculator. As we know a company can finance all its assets through a mix of capital and debt. Hence, enterprise value gives the total value of the entity taking into account the status of the company’s debt and capital.
The formula for calculating enterprise value is as follows:
Enterprise Value = Market Capitalization (entire shareholding) + Market Value of Debt – Cash and Equivalents
A detailed and extended formula could be:
Enterprise Value = Market Capitalization + Preferred Capital + Value of Debt + Minority Interest – Cash and Cash Equivalents
This becomes relevant when the acquirer is not buying the entire shareholding. And/or when minority interest and block deal offer price vary. An acquirer may like to pay a different amount (extra premium) to get the controlling stake and a different amount for the minority stake. The situation can be reverse also. Since the outgoing shareholders are willing to sell in bulk, they may be happy with a little less value than the market value. So it varies from company to company and situation to situation.
How to Calculate using Calculator?
The user has to simply enter the following data into the enterprise value calculator for a quick result.
It refers to the market value of equity shares of the company one is planning to take over. In order to acquire any company, the acquiring company will have to pay this amount to the existing shareholders for buying the shares of such a company. Shareholders of the company will only be willing to sell their shares if someone will offer a price equal to or more than the market price. Hence, we always consider the value of equity at the market price.
For market capitalization amount, enter the following two details in the calculator:
- Current market price of shares
- Total number of outstanding shares
Enter the amount of preference share capital. Such shareholders have a priority over common shareholders in case of payments and thus, we add the amount for the purpose of calculation.
Value of Debt
The value of debt is added because the acquiring company also has to discharge this liability or need to pay back the debt of the company. Also, the concept of enterprise value focuses on the total value of the company and not just equity value.
Enter the value of minority interest. This amount is added in order to arrive at the total value. As the acquirer company may be taking part (controlling) of the shareholding of the acquirer. The portion of acquiring company is already added to the consolidated value in the first step. Hence the amount of minority interest also needs an addition for calculating the remaining value not held by the acquiring company.
Cash and Cash Equivalents
The amount of cash and cash equivalents is deducted from the total value so arrived. Because once the acquisition happens, the acquirer gets a right to the balance of cash and cash equivalents. And it can utilize the same to pay off shareholders or debt holders.
Assume the total number of outstanding shares of a company X is 1,000,000 and the market price of such shares is $5 per share. The balance of cash and cash equivalents of the company stands at $500,000 and its total debt equals $100,000. the amount of minority interest is $200,000.
Enterprise Value = ($5*1,000,000) + $100,000 +$200,000 – 500,000 = $4,800,000