Understanding Enterprise Value, help?

CFA General
#1

Hey,

I really can’t understand why we add debt to equity value on the enterprise value. Doesn’t the equity value already automatically discount the debt and thus only the real amount to be paid is left? I read that the buyer always was to pay for the debt but I just can’t understand why…
Does anyone has an example where its more clear?

Thanks

#2

Think of enterprise value using a house as an example. There is the value of the house itself and there is the value of the equity after subtracting the mortgage. Enterprise value is analogous to the value of the house since it ignores the capital structure.

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#3

Thanks for the example. So the mrk cap reflects the price of the net equity (equity after debt) or is it just the price for the equity by itself (ignoring debt)?

#4

Equity value equals enterprise value minus debt.

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#5

Enterprise value is the entire value of the business. Technically, you should use market value of debt and equity but people in banking use book value of debt.

You add debt because some companies borrow money to buy operating assets. This debt must be repaid if a company is acquired, usually at a 101%.

Enterprise Value = MvDebt + MvEquity + Preferred + Minority Interest - Cash