Which formula correctly defines enterprise value (EV) for a firm?

• A. EV = market capitalization + debt + minority interest + preferred shares − cash and cash equivalents
• B. EV = market capitalization − cash and cash equivalents
• C. EV = debt + cash
• D. EV equals the company's book value

Answer: (A)

Enterprise value measures how much it would cost to acquire the whole firm, taking into account all claims on the business. The way this is captured is by adding up the market value of equity (the company's market capitalization) with the other sources of financing the buyer would need to assume—debt, any minority interests in subsidiaries, and any preferred shares—and then subtracting cash and cash equivalents that the buyer would effectively gain or could use to pay down debt. In other words, you start with equity value and add debt, minority interest, and preferred stock, then remove cash, giving a complete picture of the enterprise’s value beyond its current stock price. This matches the correct formula: market capitalization + debt + minority interest + preferred shares − cash and cash equivalents.

The other approaches miss parts of what EV captures or mix in elements that don’t reflect the takeover price. Subtracting only cash from market cap ignores debt and other claims; adding cash to debt misrepresents what the buyer would actually pay; and using book value ignores market values and the financial structure of the company.