How is Enterprise Value related to Equity Value and Net Debt?

How is Enterprise Value related to Equity Value and Net Debt?

• A. EV equals Equity Value plus Net Debt
• B. EV equals Equity Value minus Net Debt
• C. EV equals Net Income plus Depreciation
• D. EV equals Market Cap plus Cash

Answer: (A)

Enterprise Value represents the total value of a business to all capital providers. It combines what shareholders own (Equity Value) with what creditors lend (Net Debt), and it reflects that cash can be used to offset debt. Since Net Debt is debt minus cash, adding it to Equity Value gives EV. In formula form, EV = Equity Value + Net Debt. The other ideas don’t fit because Net Income plus Depreciation is an income/expense flow, not a valuation metric; subtracting Net Debt from Equity Value would understate the value of the financing used; and Market Cap plus Cash ignores debt entirely (the proper relation uses debt with cash offset, i.e., add debt and subtract cash).

Enterprise Value represents the total value of a business to all capital providers. It combines what shareholders own (Equity Value) with what creditors lend (Net Debt), and it reflects that cash can be used to offset debt. Since Net Debt is debt minus cash, adding it to Equity Value gives EV. In formula form, EV = Equity Value + Net Debt.

The other ideas don’t fit because Net Income plus Depreciation is an income/expense flow, not a valuation metric; subtracting Net Debt from Equity Value would understate the value of the financing used; and Market Cap plus Cash ignores debt entirely (the proper relation uses debt with cash offset, i.e., add debt and subtract cash).