Hmm that sounds misleading for the conversation at hand.

If enterprise value is market cap - debt (forget cash) then you’re saying this is the net dollar value of owning every share of Tesla.

But “rational” investors are aware of debt. It would seem to me you should be adding the debt to the perceived future earnings to actually come up with gross expected income.

That is if I buy Tesla and Ford for $10 each, and the Ford has no debt, and the Tesla has $10 debt, and I pay $10 because I consider them equal value... that would mean you expected total future earnings from holding each to be $10 from Ford and $20 from Tesla.

That's a little miss-leading because Ford's EV includes a lot of debt for car loans & leases which tend to get paid back by someone else and are secured by the cars.

Book value = assets - liabilities

Market value = market capitalization

Bondholders have claims on part of the company's assets and these claims reduce the value of the company (that's the liabilities part of the equation).

Pensioners don't have any claims on anything except perhaps on their pension funds if they have one.

Right, those other claim holders represent reductions in the value of the company.

If I borrow $300 billion (heh) and call myself a car company, that doesn't make me a more valuable company than Ford and Tesla combined - my net worth hasn't changed.

Market cap == (perceived) value.

Enterprise value is the COST TO PURCHASE the company, if I'm considering buying it.

Like buying a used car and assuming payments:

  enterprise value (real cost) = purchase price + loan balance - coins under the seats

  Market cap is the cash I have to pay up-front
  Debt is the new debt I will have to pay when I own it.
  Cash-on-hand is the cash I get back when I buy it

The enterprise value is the value of a company.

enterprise_value = market_cap + debt - cash

Different companies are capitalized differently - some use all equity, some all debt, some a mix.

Not sure I agree that other claim holders represent reductions in the "value of the company". The same company can be capitalized different ways - the enterprise value for that company should be unchanged.

Enterprise Value is absolutely not the “value” of the company. The Enterprise value is the actual amount a company will cost you if you buy it at Market Cap.

IOW, if you buy a company for a $100bn but it has liabilities of another $100bn that means it’s cost to you is actually $200bn, because you will also have to pay that additional $100bn. That’s why cash reduces the EV of a company, because if you pay $100bn for a company that has $50bn in cash, you effectively paid only $50bn (which is the EV).

Market cap is the value of a company.

Market cap is the market value of a company's equity.

market_cap = total_shares_outstanding * share_price

I passed all three CFA exams a few years back and studied this extensively. I might be remembering incorrectly, but think you're making factually incorrect statements. Appreciate your comment and the motivation to think about this more.

I recommend reading up on these terms: * market value of equity * book value of equity * intrinsic value of equity

Hold market cap constant.

Borrow $1 trillion. Burn the cash.

Is the company now more or less valuable?

By your formula, how has the enterprise value changed?

> Is the company now more or less valuable?

More. Normally burning a trillion dollars would have taken about a trillion off the market cap, so if it held steady that means a trillion dollar gain somewhere else.

"There's a pony here somewhere!"

Yup, there's a pony buried in your assumptions.

This isn't "my formula" - it's the textbook finance formula: https://en.wikipedia.org/wiki/Enterprise_value

Less valuable. What you're missing is that the reason debt is counted is because it is used to buy up assets. In this case, if the cash is entirely burned, it means the value of equity dropped to zero because debt typically has collateral. So the trillion dollars you borrowed would need to be paid back by selling the rest of the company's assets. So in reality, if let's say this trillion dollar debt was super senior and first claimant to assets. It'd drop to the previous market value of the company and the rest of the company's capital structure drops to zero.

Absolutely.

Enterprise Value is a metric used for acquisitions to determine the real cost of acquiring a company (that’s why cash lowers enterprise value, since it helps pay off some of the cost of acquiring the company, and liabilities increase the enterprise value because those are additional amounts of money you will Have to pump into the company).

If you borrow $300 billion you still have $300 billion in assets. Unless something unexpected changes, Ford won't be able to realize that Enterprise value. The number of car companies will shrink, not grow, evs are just the wave over the horizon that will really hurt them. Tesla actually has a chance to drastically grow their sales.

Right - $300 billion in assets, plus $300 billion in debts means the company is worth:

  a) $600 billion
  b) $300 billion
  c) $0

If you choose anything other than c, I'd love to sell you some businesses.

(B). The company is worth $300 billion to the bondholders, and $0 to shareholders, giving a total value of $300 billion.

And that's assuming the company is being liquidated. Most companies with viable businesses are worth a lot more than their assets because the big part of the valuation is assumed future earnings.

> The company is worth $300 billion to the bondholders, and $0 to shareholders, giving a total value of $300 billion.

But if it was cash and debts instead of assets and debts, the company wouldn't be worth $300 billion to bondholders?

If you spend a dollar to buy a chocolate bar, you say the chocolate bar is worth $1 and that you spent $1.

If you give a teller $1 for 4 quarters, you don't say that you spent $1.

I borrow $10 from a friend.

I currently am worth $0 to that bondholder.

I spend one of those borrowed dollars on a chocolate bar.

Now I'm worth $1 to that bondholder??

The spending is done with a completely different person than the bondholder.

So you can create infinite value by borrowing more and more money.

I'd love to create lots of value for you by borrowing money from you. I would even consent to not destroy any of that value through making payments.

The bond is worth $300b to the bondholders, but only because it is expected to be paid back and is secured by the $300b assets. You can prove that by assuming those assets disappeared: how much is the bond (or the company) worth to the bondholders then?

Every single fair transaction has a net value of $0. If I buy a chocolate bar for $1 that's worth a dollar to me, I'm up one chocolate bar worth $1 and down a dollar. No net worth change, but it is validation the chocolate bar is worth $1.

You don't add up assets and debt. You add up equity and debt and make it match up to assets.

assets + liabilities = book_value_of_equity

The intrinsic value of a company's equity often differs from the book value of equity.

The book value debt can also differ from the market value.

Learning some financial accounting concepts should help you understand this better.