How can you calculate equity value from enterprise value, debt, and cash?

To calculate equity value from enterprise value, debt, and cash, the correct formula is to take the enterprise value, subtract total debt, and then add cash. This relationship stems from the definitions of enterprise value and equity value.

Enterprise value represents the total value of a company's operations and is calculated as the market value of equity (equity value) plus debt, minus cash. In simpler terms, enterprise value is what it would cost to buy the entire business, including its debts, but net of its cash.

When you need to isolate equity value, you can rearrange the equation. Since enterprise value includes both equity and debt, subtracting debt from enterprise value gives you the value of the company attributable only to equity holders. By adding cash back to this amount, you account for liquid assets that can be used to pay down liabilities, thereby increasing the equity value held by shareholders.

Thus, the formula: Equity Value = Enterprise Value - Debt + Cash accurately reflects this relationship and is the correct approach.