Which statement correctly defines Enterprise Value (EV) relative to Equity Value?

Which statement correctly defines Enterprise Value (EV) relative to Equity Value?

• A. EV = Equity + net debt
• B. EV = Equity - net debt
• C. EV = Cash + Equity
• D. EV = Net debt - Equity

Answer: (A)

Enterprise Value shows the total price you’d pay to acquire a business, combining what equity holders own with what lenders are owed, while accounting for cash on hand. If you define net debt as total debt minus cash, then the value to a buyer is the equity value plus that net debt. In other words, you’d need to pay the market value of the equity and also assume the company’s net obligations after using any cash on hand, which is exactly Equity Value plus Net Debt. This framing captures why debt increases the takeover price (you must assume it) and why cash reduces the net cost (it can be used to offset part of the debt). Other formulations that add cash or subtract debt in different ways don’t align with the idea of the buyer’s overall obligation to acquire the firm, so they don’t reflect the true enterprise value.

Enterprise Value shows the total price you’d pay to acquire a business, combining what equity holders own with what lenders are owed, while accounting for cash on hand. If you define net debt as total debt minus cash, then the value to a buyer is the equity value plus that net debt. In other words, you’d need to pay the market value of the equity and also assume the company’s net obligations after using any cash on hand, which is exactly Equity Value plus Net Debt.

This framing captures why debt increases the takeover price (you must assume it) and why cash reduces the net cost (it can be used to offset part of the debt). Other formulations that add cash or subtract debt in different ways don’t align with the idea of the buyer’s overall obligation to acquire the firm, so they don’t reflect the true enterprise value.