How do you calculate Enterprise Value (EV)?

Enterprise Value (EV) is a critical metric used to assess a company's total value, particularly helpful for potential investors. It serves as a comprehensive measure because it takes into account not just the company’s equity but also its debt and excludes cash reserves, thereby giving a clearer picture of the company's value as if it were to be acquired.

The correct method to calculate EV involves starting with the market capitalization, which reflects the total value of a company's outstanding shares. From there, total debt is added to capture the company's obligations that potential acquirers need to consider. At the same time, cash and cash equivalents are subtracted because these assets would be available to reduce the cost of acquisition. When these elements are combined, the formula is:

Enterprise Value = Market Capitalization + Total Debt - Cash and Cash Equivalents.

This calculation represents the theoretical takeover price of a company and is more informative than simply looking at market capitalization alone, as it also considers the financial leverage and liquidity of the firm.

Other options do not accurately represent the components necessary for EV calculation, which is why they may lead to misunderstanding of the company's total value. Therefore, the given option correctly encapsulates the total enterprise value by considering all relevant financial elements.