Question

  6. RANK the following 3 values from the Largest to the Smallest for a typical firm. Assume that the amount of debt held exceeds the amount of cash held by the firm. (PLEASE CLEARLY NOTE RANKING ORDER ).  

     Market Capitalization vs Shareholders’ Equity vs. Enterprise Value

Answer 1

6. The ranks are as follows :

Enterprise value = Total market capitalization + debt - cash value.

As, debt exceeds the amount of cash held by the firm,the EV is higher than the market capitalization.

So, the Enterprise value is greater than the Market capitalization. Market capitalization is the market value and the shareholders equity is less than the market cap, as the shareholder equity is the book value. Market capitalization is much bigger than the shareholders equity as per the balance sheet.  Enterprise value is the value of the core business operations that is available to all debt, preferred and equity holders and the shareholders equity is available only to the equity holders.

So, the ranks are :

• Enterprise value ( assumimg the dbet held exceeds the cash)
• Market capitalization
• Shareholders equity