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← Series 79: Collection, Analysis & Evaluation of Data
Series 79 practice questionmediumEnterprise Value vs Equity Value

Why is cash subtracted when calculating enterprise value from equity value?

  1. ACash generates negative returns due to inflation
  2. BCash is already included in the market capitalization
  3. CAccounting standards require cash to be excluded from valuation
  4. DCash is not an operating asset and could theoretically be used to pay down debt immediately✓ Correct answer
Explanation

Why D — Cash is not an operating asset and could theoretically be used to pay down debt immediately

Cash is subtracted from the equity-to-enterprise value bridge because it is a non-operating asset that could theoretically be used to immediately reduce the acquisition cost by paying down debt. In effect, an acquirer is buying the operating business net of the cash on the balance sheet. If a company has $100M of enterprise value and $20M in cash, an acquirer could use that cash to effectively reduce the net cost of the acquisition.

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