Enterprise Value

EV = Equity Value (Market Cap) + Total Debt + Preferred Stock + Minority Interest - Cash & Cash Equivalents. You add debt because an acquirer assumes the target's net debt obligations. You subtract cash because the acquirer gets the target's cash, effectively reducing the net cost. Preferred stock and minority interest are added because they represent claims on the enterprise that are senior to common equity. This bridge is one of the most important concepts in banking.

Market cap only reflects the value of equity. Two companies with identical operations but different capital structures will have different market caps but similar enterprise values. For example, Company A (all equity, $500M market cap) and Company B ($250M market cap + $250M debt) both have EV of ~$500M. Using EV-based multiples (EV/EBITDA, EV/Revenue) ensures you're comparing the full business, not just the equity slice.

When a PE firm acquires a company in an LBO, they pay enterprise value. The equity check (cash the PE firm actually invests) equals EV minus the debt they refinance. In M&A, offer prices are typically expressed as an EV/EBITDA multiple. If a target has $100M EBITDA and the acquirer offers 10x, the enterprise value is $1B. The actual equity consideration paid to shareholders depends on how much existing debt is assumed or refinanced.

Sophisticated EV calculations include additional adjustments: operating leases (now on-balance-sheet under ASC 842), unfunded pensions, non-controlling interests, and equity investments. Some bankers also subtract non-operating assets beyond cash (e.g., excess real estate). In interviews, start with the basic formula but mention that you'd add operating leases and unfunded pensions for a more precise figure. This shows depth of knowledge.