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Enterprise Value

The total value of a company's operating business, calculated as market capitalization plus total debt minus cash (and cash equivalents). Enterprise value is capital-structure-neutral, which is why it is used as the numerator in multiples like EV/EBITDA, and is converted to implied equity value by subtracting debt and adding back cash.

Practice questions using Enterprise Value

Original questions written against the published FINRA and NASAA exam content outlines — not actual exam questions. Every choice is explained.

Fictional issuer Meridian Robotics has 10 million shares outstanding trading at $40 per share, total debt of $60 million and cash of $20 million. What is its enterprise value (EV)?

  1. A.$400 millionWrong. This is market cap alone, ignoring the net-debt bridge to EV.
  2. B.$480 millionWrong. This adds both debt and cash instead of subtracting cash.
  3. C.$440 millionCorrect. $400M + $60M − $20M = $440 million.
  4. D.$340 millionWrong. This subtracts both debt and cash instead of adding debt and subtracting cash.

Why: EV = market capitalization + total debt − cash. Market cap = 10M shares × $40 = $400M. EV = $400M + $60M − $20M = $440 million.

A set of precedent transactions in fictional target Corvane Industries' sector averaged 10.5x LTM EBITDA. Corvane's own LTM EBITDA is $40 million. Applying the average precedent multiple, what is Corvane's implied enterprise value?

  1. A.$420 millionCorrect. 10.5x × $40M = $420 million.
  2. B.$40.5 millionWrong. This adds the multiple and EBITDA figures as if they were both dollar amounts.
  3. C.$3.81 millionWrong. This divides EBITDA by the multiple instead of multiplying.
  4. D.$450 millionWrong. This does not correctly multiply the given figures.

Why: Implied EV = precedent multiple × target LTM EBITDA = 10.5x × $40M = $420 million.

A peer set trades at an average EV/EBITDA multiple of 9.0x. Fictional private target Larkspur Components has EBITDA of $30 million, total debt of $50 million and cash of $10 million. Applying the peer multiple, what is Larkspur's implied equity value?

  1. A.$270 millionWrong. This is implied enterprise value; it has not yet been bridged to equity value.
  2. B.$310 millionWrong. This adds debt instead of subtracting it.
  3. C.$220 millionWrong. This subtracts cash instead of adding it.
  4. D.$230 millionCorrect. $270M − $50M + $10M = $230 million.

Why: Implied EV = peer multiple × target EBITDA = 9.0x × $30M = $270M. Implied equity value = EV − debt + cash = $270M − $50M + $10M = $230 million.

Applying the precedent transaction multiple to Corvane Industries implies an enterprise value of $420 million. Corvane has total debt of $90 million and cash of $15 million. What is the implied equity value?

  1. A.$495 millionWrong. This adds debt instead of subtracting it.
  2. B.$420 millionWrong. This is the implied enterprise value, not equity value; the bridge has not been applied.
  3. C.$345 millionCorrect. $420M − $90M + $15M = $345 million.
  4. D.$315 millionWrong. This subtracts cash instead of adding it.

Why: Implied equity value = implied EV − debt + cash = $420M − $90M + $15M = $345 million.

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