How is Enterprise Value (EV) calculated?

Enterprise Value (EV) is a key financial metric used to assess the total value of a business. The correct method for calculating EV involves adding the market capitalization of a company to its total debt, and then subtracting cash and cash equivalents.

The rationale behind this formula is that EV represents the entire value of a firm from the perspective of all its stakeholders, including both equity and debt holders. Market capitalization reflects the equity value, but to get a fuller picture of value, one must add the total debt, as this represents obligations that will need to be met. Conversely, cash and cash equivalents are subtracted from this sum because they are liquid assets that can be used to reduce debt or are available for use in operations, effectively lowering the overall enterprise value that a buyer would pay.

This calculation provides a clearer snapshot of a company's worth, taking into account not just equity but also liabilities and available resources. Thus, option B correctly captures the essence of EV calculation by combining these elements in a way that reflects the total financial obligations and resources associated with a company.