Enterprise Value (EV) Definition
Enterprise Value is simply the total market value of the firm which includes the value of all equity holders as well as debt holders. The EV method is often considered a better measurement for Merger and Acquisition (M&A) activity than most other valuations.
Enterprise Value (EV) Meaning
The enterprise value is a great measure for the total value of a firm and is often a great starting point for negotiations for a business. This is because the EV takes into account the debt holders which should be part of an acquisition price as the acquiring firm will be purchasing the amount of debt as well as equity. The valuation often takes place by using the formula below or by finding the EBITDA of the target and discounting it back at the WACC. The value is then derived by using some multiple or a perpetuity method may be better if a long term growth rate can be determined for the company.
Enterprise Value (EV) Formula
The EV formula is as follows: