Enterprise Value (EV)

When you ask the question "What would it take to replace this thing right now?" you get the enterprise value.

Notionally, a home carries an enterprise value that is the sum of the equity down payment of $100k plus the loan of $400k that it took to buy the half million dollar shoebox in Palo Alto. The enterprise value of that home is the $500k.

Similarly, in a business, a given company might have $100M in cash flow, or EBITDA, in an industry in which it trades at the median multiple of its peer group of 10x EBITDA. But it has $300M in debt, and virtually no cash on hand. So its likely market value would be something close to $700M, well below its enterprise value of $1B.

Related or Semi-related Video

Finance: What is Market Capitalization v...171 Views

00:00

finance a la shmoop- what is compounding value or compounding interest? ah the

00:08

power of compounding. it makes trees stronger pollution more feral and the

00:14

rich well richer. how so well let's start with compounds kissing

00:18

cousin with six toes, arithmetic compounding. right so the first was [feet with six toes pictured]

00:23

really geometric compounding now we're talking about arithmetic compounding. if

00:27

you invest a thousand bucks in a ten-year bond that pays 6% of a year in

00:30

interest, the dough comes back to you in a pattern that looks like this - like

00:35

every six months they pay thirty bucks and it's $60 a year, got it? nice. you get

00:41

the total of sixteen hundred bucks back from your investment and the cash that

00:45

came back to you you know came in small parts all along the way, until you got [list of yearly returns]

00:49

about two thirds of it or sixty percent at the end right? if you just spent that

00:53

money and collected your thousand bucks at the end that's it. okay so that's

00:58

arithmetic compounding/ the money comes to you if you don't reinvest it.

01:01

ding-ding-ding that's the key here and you just go buy burgers. okay so now

01:06

let's look at what six percent compounded looks like over the same

01:10

10-year period .well at the end of year one it's a thousand sixty bucks and note

01:14

we're only gonna compound it annually we probably should do the semi-annually but [list of yearly compounds]

01:18

we'd confuse you even more so don't do that. but then you essentially reinvest

01:21

that money and you get another six percent compounded on that thousand

01:25

sixty , instead of six percent compounded against the original thousand. so by the

01:30

end of year two you'll have a thousand one hundred twenty three sixty. and by

01:34

the end of year ten you'll have one thousand seven hundred and ninety

01:37

dollars and eighty-five cents. so why do you make so much more money when you

01:41

compound interest versus getting 30 bucks twice a year like you would in

01:46

this bond example? go and find burgers with it? yeah .you don't want to do that

01:50

well essentially what's happening is that you're delaying your gratification [man in a drive through window]

01:53

of getting that sweet sweet cash or getting liquid whatever you want to call

01:58

it. by reinvesting your gains year after year after year. so do you have that sort

02:04

of self-control? do you need the cash yeah that's the question if you for

02:08

example have trouble making it home from your local pizza spot with the pie

02:12

in tact well then compound interest keeping the discipline to not spend the [man eats pizza while driving]

02:16

money today and wait for the happiness tomorrow well when that may not be for

02:20

you. sorry

Find other enlightening terms in Shmoop Finance Genius Bar(f)