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Market cap versus enterprise value

Market cap prices the equity alone; enterprise value adds net debt and other claims to price the whole business regardless of who funded it.

The bridge is market cap plus total-debt plus minority interests and pension deficits, less cash-and-equivalents and marketable-securities. What remains is the price of the operating business.

The distinction decides which multiple to use. A heavily indebted company can look cheap on pe-ratio and expensive on ev-ebitda, and the second view is the one an acquirer would take, because the buyer inherits the debt.

Example: Northwind Tools has a $2.5B market cap, $620M of total debt, a $24M pension deficit and $285M of cash, giving an enterprise value of $2.86B against $195M of EBITDA.

Related: net-debt, ev-ebitda, market-cap, total-debt, valuation-multiple

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