Enterprise value: build the bridge from equity value, debt and cash

Define which capital components belong in the model

CFA Institute distinguishes the market value of equity from a measure covering more capital providers. Here we define EV as market capitalisation plus the market value of debt minus available cash. The company has only ordinary shares, with no non-controlling interests, preferred shares, leases or other financial investments. This is a teaching simplification.

There are 300 shares at SEK 40, debt whose assumed market value is SEK 7,000 and cash of SEK 3,000. The supplied debt value is a premise: an actual book debt amount need not always equal its market value. Other definitions may require more components and adjustments, so the label EV alone does not specify the calculation.

If the table does not fit, scroll it sideways.

New borrowing changes two components

Start from the table and let the company borrow SEK 2,000, paid into cash. Assume debt market value rises by the full amount and the share price stays constant. Debt becomes 9,000 and cash becomes 5,000. EV remains 12,000 + 9,000 − 5,000 = SEK 16,000.

This is a chosen calculation scenario, not a statement about how a real share price reacts to borrowing. If cash is subsequently spent while debt value remains, the bridge must be recalculated. The dates for equity value, debt and cash also matter. Mixing old and new balance information needs an explanation rather than a silent substitution.

A different share price changes equity value

Restore debt and cash to SEK 7,000 and SEK 3,000. A separate quote card supplies a price of SEK 20 for the same 300 shares. Market capitalisation becomes 6,000 and EV becomes 6,000 + 7,000 − 3,000 = SEK 10,000. Equity value and the wider capital measure have different totals.

Dividing 10,000 by 300 gives about SEK 33.33, but that is not the card’s observed price of SEK 20. EV includes debt less cash in this example. A total covering several capital providers cannot be allocated directly to shareholders as though the whole amount were their market capitalisation.

Use the bridge to explain the data

Record which values are observed, assumed and missing. Check that share count belongs to the equity value and that cash and debt follow the chosen definition. A completed model calculation does not automatically identify a reasonable acquisition price, future earnings or which share is cheapest. Those are different questions requiring more information.

Connect the exercise to Investiq company search when checking which company the information concerns. The lesson promises no automatic EV calculation, valuation tool or complete debt data in the app. Continue with net debt to explore loans and cash, or with market capitalisation if you want to revisit share count and price.