CFA Practice Question

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CFA Practice Question

Which one measures the amount of equity cushion beneath the debt?
A. Preferred stocks
B. Accumulated retained earnings
C. Enterprise value
Explanation: Think of enterprise value as the theoretical takeover price. In the event of a buyout, an acquirer would have to take on the company's debt but would pocket its cash. EV differs significantly from simple market capitalization in several ways, and many consider it to be a more accurate representation of a firm's value. The value of a firm's debt would need to be paid by the buyer when taking over a company; thus, EV provides a much more accurate takeover valuation because it includes debt in its value calculation.

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