I know I could learn it by memory, however I’d rather understand the rationale of the formulas. Why is debt added to Market Cap, and Cash & equivalents deducted from it?

In my opinion, if I’d like to buy a house that is worth 100,000 , but has a 10,000 mortgage, I’d pay 90,000$ for it (MV-debt), because I will have to take on the debt. Finally, if the house has 10,000$ inside I’d be willing to pay 10,000$ more, since that money increases the value of the asset I’m acquiring.

According to my reasoning, the formula should be like this to me:

EV = MCap - debt + cash & equivalents

I assume I’m wrong, but I would like to know why! Thanks in advance.

The easiest way to remember this is that the EV represents what an acquirer would have to pay for the an entire company. It represents a more realistic purchase price.

If you think about it. EV = Equity Value + Debt + Minority Interest + Preferred Stock - Cash and Cash Eqv.

Debt, Minority Interest and Preferred Stock have to be added into the TOTAL cost of the company. You subtract cash our since an acquirer would just receive that cash once the acquisition is complete.

If you want to buy the company, you have to pay for the stock and assume the liabilities. But when you buy the company you get all of their assets, including their cash and cash equivalents. So you pay a bunch of cash and get some cash back, like the rebates they tout in car commercials. The enterprise value is the net, just as in the car commercials.