Enterprise Value is fairly straight-forward. There’s not much of a ‘best way’ to calculate it.
[math]Enterprise Value = Market Capitalization + Preferred Shares + Convertible Shares + Debt – Cash[/math]
Market Capitalization: This could either be the actual Price * Number of Shares Outstanding of the company, if the company is public. If the company is held privately, you could make it Value * Number of Shares Outstanding of the company (Basically the Cumulative Discounted Free Cash Flow to Firm). When used for the purpose of calculating Ratios however, they both mean different things. I prefer to use a multi-period Discounted Cash Flow method to value the equities of companies.
Preferred/Convertible Shares: Assume that they will be converted to regular shares of the company upon an immediate takeover. These don’t make a major part of a company’s capital. So this approximation for the sake of simplicity shouldn't hurt a company’s EV too much.
Debt: The “Market Value” of Debt doesn’t change very often. But if the company has a substantial amount of long-term Debt and a constantly fluctuating credit score, you may want to value Debt as well. Consider the entire debt of the company as a single Fixed Income instrument. Therefore, the interest expense on that debt would be the coupon on the Fixed Income instrument. The Maturity Period would be the weighted-average maturities of all the different types of debt of the company (If they do have different types of debt). So, the value of debt would be:
[math]MV (Debt) = C*((1-(1/(1+r)^t))/r) + (D/(1+r)^t)[/math]
Where [math]C[/math] = Interest Expense on the Debt (Considered here as a Coupon)
[math]r[/math] = An appropriate discount rate (Say, the Repo Rate)
[math]t[/math] = Weighted-average Maturity of Debt
[math]D[/math] = Total Debt
Cash: Mostly taken at face value, unless ‘cash equivalents’ include stuff like Inventories and Receivables, which require their own market value calculations based on their quality. But ignoring the need for a perfect valuation, they can just be taken at their face value.
In summary, if the EV calculation is being done to calculate Ratios like EV/EBIT or EV/EBITDA, then I think going through all the trouble to calculate the market values of debt and cash equivalents is unnecessary. Taking the book value of debt and cash equivalents should suffice, unless you have reason to believe that the company is cooking its books.
Personally, EV/EBITDA or EV/EBIT as valuation metrics make no sense to me. EBIT and EBITDA are accounting figures tailor-made to make a company’s Financials looks better. If a company earns well, but fails to make proper allocation for Capital Expenditure, would you still be interested in buying that company? If a company earns well, but does no tax planning activities, would you still buy that company?
If you won’t, then you have no business considering the EBITDA or the EBIT – or the more recent, more convoluted and retarded EBITDARD (It’s a thing, I swear, look it up). Oh look! It has more alphabets, so it must be more authentic! It’s almost like Accountants are trying very hard to dress up the Earnings figure for the Financial Statements, just like how parents try very hard to dress up their kid for a stage show. In the end, both the Earnings figure and the kid end up looking awkward as hell.