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Enterprise value

Market cap plus debt and preferred stock, minus cash: what it would cost to buy the whole business free of its balance sheet.

Enterprise value answers the acquirer's question. If you bought every share you would also inherit the debt and get the cash, so the real price is market-cap plus net debt. It lets you compare companies with different amounts of leverage on the same footing.

It also explains why a heavily indebted company can look cheap on pe-ratio and expensive on EV multiples. Watch EV in any leveraged-buyout or merger story, since the headline offer per share is only part of what the buyer pays.

Example: 200M shares at $25 is $5.0B of market cap. Add $2.0B of debt, subtract $600M of cash, and EV is $6.4B, 28% above the equity value.

Related: market-cap, leveraged-buyout, deal-premium, book-value

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