Enterprise value and equity value are both measures of the business’ worth, but the enterprise value, in contrast to the other, does not consider the mere capital structure of the company.
The enterprise value is seen as a more comprehensive measure since it considers, in addition to the market value of equity, all the debt and cash.
ENTERPRISE VALUE = Market Value + Debt - Cash
So this measure takes into account not only market capitalization (number of shares outstanding * price of a share) but also short-term and long-term debt as well as cash reserves.
It is also referred to as the net present value of the business.
In the formula we add, to market value of equity, the debt outstanding because, if the company were to be purchased, it would increase the cost to buy it, and we subtract the cash because it would reduce that cost.
Equity value, on the other hand, is ’’simply’’ the market value of the business, given the already mentioned formula number of shares outstanding * price of a share.
Then it can also be computed from the enterprise value’s formula as:
EQUITY VALUE = Enterprise value - Debt + Cash
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