Why do we include minority interest in enterprise value calculations?

Including minority interest in enterprise value calculations is essential because it ensures the financial statements reflect the total ownership of a company, even when partial ownership exists. This aspect reflects the entire value of a business, accounting for both controlling and non-controlling interests.

When calculating enterprise value, which is used by investors to gauge the total value of a company, including minority interest provides a holistic view of the company’s worth. It acknowledges that there are other stakeholders who have a financial interest in the subsidiary, and therefore, their contribution to the value of the firm should be included. This gives a more complete picture of the financial health and obligations of the enterprise as a whole.

Other options do not align with this principle. For example, increasing reported revenue or accounting for subsidiary debt lacks relevance in the context of enterprise value, as enterprise value focuses on the overall valuation of the company, not solely on revenues or specific debts. Additionally, the assertion that including minority interest reduces investment risk is not accurate in this context, as investment risk is influenced by a variety of factors independent of this calculation.