Archive / Investment Adviser (Level 1) / Investing in Stocks

nism-series-xa-enterprise-value-calculation-market-cap-debt-cash[ INVESTMENT ADVISER (LEVEL 1) ]

A listed enterprise reports Market Capitalization of ₹8,500 Crore, Total Debt Liabilities of ₹2,200 Crore, and Liquid Cash Balances of ₹900 Crore. What is the Enterprise Value (EV) of the firm?

[ A ]₹8,500 Crore

[ B ]₹9,800 Crore (Market Cap + Debt - Cash)[ CORRECT ]

[ C ]₹6,300 Crore

[ D ]₹11,600 Crore

Takeaway

Enterprise Value is ₹9,800 Crore, computed as Market Capitalization plus Total Debt minus Cash and Cash Equivalents.

Derivation

Step 1: Start with Market Capitalization = ₹8,500 Crore (the market's valuation of equity alone). Step 2: Add Total Debt of ₹2,200 Crore, because an acquirer taking over the whole company would also have to assume its debt obligations. Step 3: Subtract Cash of ₹900 Crore, because that cash could immediately offset part of the acquisition cost. EV = 8,500 + 2,200 - 900 = ₹9,800 Crore. EV is preferred over market cap alone for comparing companies with different capital structures, since two firms with identical market caps but very different debt/cash levels represent very different total takeover costs — a distinction the exam tests through this direct calculation.

Why the others fail

A — ₹8,500 Crore

₹8,500 Crore is only the equity market capitalization; it omits the debt an acquirer would assume and the cash that would offset the purchase price, so it understates true enterprise value.

C — ₹6,300 Crore

₹6,300 Crore results from subtracting debt from market cap instead of adding it — EV must add debt, since an acquirer must also absorb the target's outstanding liabilities.

D — ₹11,600 Crore

₹11,600 Crore results from adding cash instead of subtracting it — cash reduces the effective acquisition cost and must be deducted, not added, in the EV formula.