Enterprise / Equity Value - Advanced

1 / 3
Are there any problems with the Enterprise Value formula you just gave me?
Click the card to flip 👆
Terms in this set (3)
Yes - it's too simple. There are lots of other things you need to add into the formula with real companies:

- Net Operating Losses: Should be valued and arguably added in, similar to cash.
- Long-Term Investments: These should be counted, similar to cash.
- Equity Investments: Any investments in other companies should also be added in, similar to cash (though they may be discounted).
- Capital Leases: Like debt, these have interest payments - so they should be added in like debt.
- (Some) Operating Leases: Sometimes you need to convert operating leases to capital leases and add them as well.
- Pension Obligations - Sometimes these are counted as debt as well.

So a more "correct" formula would be:

Enterprise Value = Equity Value - Cash + Debt + Preferred Stock + Minority Interest - NOLs - Investments + Capital Leases + Pension Obligations...

**In interviews you van usually get away with the simpler Enterprise Value equation.
Technically, you should use market value for everything. In practice, however, you usually use market value only for the Equity Value portion, because it's almost impossible to establish market values for the rest of the items in the formula - so you just take the numbers from the company's balance sheet.