What is enterprise value?
A core Valuation interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Enterprise value is the value of a company's core operations attributable to all capital providers — equity holders and debt holders alike. Practically: EV = equity value + net debt, plus minority interest, preferred stock and debt-like items such as pension deficits, less cash and non-operating assets. Because it is capital-structure-neutral, EV is the right numerator for operating multiples such as EV/EBITDA or EV/EBIT. The discipline is consistency: pair EV only with metrics that also belong to all investors, and bridge from EV to equity value by deducting net debt and debt-like items when you move to the shareholders' view.
WHAT INTERVIEWERS LISTEN FOR
- ✓Value of operations for ALL capital providers — capital-structure-neutral
- ✓EV bridge: equity value + net debt + minorities + preferred + debt-like items − non-operating assets
- ✓Right numerator for operating multiples (EV/EBITDA, EV/EBIT)
- ✓Consistency rule: numerator and denominator must serve the same claim-holders
COMMON MISTAKES
- ✗Pairing EV with net income (a claim of equity holders only)
- ✗Forgetting debt-like items (pensions, earn-outs, factoring) in the bridge
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CORE QUESTIONS IN THIS CLUSTER
- Walk me through a DCF.
- How do you calculate WACC?
- What is WACC?
- What is EBITDA?
- What is the difference between Enterprise Value and Equity Value?
- What is the difference between the Gordon Growth Model and the Exit Multiple Method for terminal value?
- Walk me through the three financial statements and how they connect.
RELATED QUESTIONS
- Walk me through the Enterprise Value bridge.
- Why can't you use Equity Value / EBITDA?
- A company has $100m face value of in-the-money convertible bonds (conversion price $20, current share price $30). How should you treat the convertible in the enterprise-value bridge? Walk through the calculation.
- How do you incorporate a company's excess cash and non-operating assets into a valuation?
- What is the correct treatment of minority interest in Enterprise Value and valuation multiples?
- A company has a market cap of $500M, total debt of $200M, cash of $50M, and 10 million shares outstanding. It also has 1 million in-the-money stock options with an exercise price of $20. The current stock price is $50. What is the diluted Enterprise Value?