Enterprise Value = Market Value of Common Share + Market Value of Preferred Shares + Market Value of Debt + Minority interest - CASH. Anyone know why we add Market Value of Debt? I understand the definition of Enterprise Value - the value of the business as a whole, which includes debt and equity. Just unclear why we add it - debt - back.
If the value of the business includes the debt, of course you’d have to add the debt with the equity.
on the balance sheet of the books - you have the Book value of debt. Between the time the company acquired the debt and the current time (when you are putting a value on the company) interest rates could have moved up / down causing the market value of the debt to fall / rise. Also EV could be used to make comparisons between / amongst a bunch of companies - and using the current market value of debt makes the comparison a whole lot better, rather than comparing old book values of debt - which would not be making an apples-to-apples comparison.
I don’t think the original poster is specifically asking about “market” value of debt, his/her question (OP: correct me if I’m wrong) is why add debt in the first place? If you buy a stock you pay for its price, not its debt, I think this is what he’s getting at. If so, the answer is that if you want to buy the whole company, then all of its debt is your responsibiity, so you have to add the debt on the company to your total cost, although you only pay the market cap, you eventually have to pay the debt, so you add it to your total cost. On the other hand, you get to keep the cash, so you deduct that from the final value/cost.
Thanks all. I don’t know why, but I didn’t get it conceptually. Dreary, your explanation cleared it up. You’ll have to pay down the debt, which will add to how much you pay for the firm.