Los 46.l

Question 1

What does Enterprise Value (EV) measure, and how can it be interpreted?

Answer 1

EV measures total company value. It represents the cost to acquire a firm.

Question 2

What is the formula for calculating Enterprise Value (EV)?

Answer 2

EV = Market Value of Common & Preferred Stock + Market Value of Debt - Cash & Short-Term Investments

Question 3

Why are cash and short-term investments subtracted in the EV calculation?

Answer 3

They reduce the acquirer’s net cost because the acquirer receives these liquid assets.

Question 4

When is using Enterprise Value particularly useful for comparison?

Answer 4

When comparing firms with significant differences in capital structure.

Question 5

What are common denominators used in EV multiples, and what is an advantage and disadvantage of using EBITDA?

Answer 5

EBITDA and operating income.
EBITDA is often positive even when earnings are negative. However, it can include non-cash revenues and expenses.