In enterprise value calculation, cash is subtracted why?

In enterprise value calculation, cash is subtracted why?

• A. Cash is considered a non-operating asset not required by the ongoing business.
• B. Cash is subtracted because enterprise value represents the value to all financiers net of cash.
• C. Cash is treated as part of debt in EV calculation.
• D. Cash is added to enterprise value to reflect liquidity.

Answer: (B)

Enterprise value is the value of a company’s core operations to all providers of capital, so cash on hand is treated separately. Cash is readily available funds that aren’t needed to run the business day to day. When you buy a company, that cash comes with it or can be used immediately to pay down debt or return to shareholders. That means the buyer’s net outlay is reduced by the cash, so it’s subtracted in the EV calculation. A simple way to see it is EV = equity value + debt + minority interest + preferred stock − cash and cash equivalents. For example, if equity value is 1,000, debt is 500, and cash is 200, enterprise value would be 1,300. Subtracting cash prevents double-counting the amount the buyer wouldn’t need to finance because it’s already available.

Enterprise value is the value of a company’s core operations to all providers of capital, so cash on hand is treated separately. Cash is readily available funds that aren’t needed to run the business day to day. When you buy a company, that cash comes with it or can be used immediately to pay down debt or return to shareholders. That means the buyer’s net outlay is reduced by the cash, so it’s subtracted in the EV calculation. A simple way to see it is EV = equity value + debt + minority interest + preferred stock − cash and cash equivalents. For example, if equity value is 1,000, debt is 500, and cash is 200, enterprise value would be 1,300. Subtracting cash prevents double-counting the amount the buyer wouldn’t need to finance because it’s already available.