Enterprise & Equity Value
Why do you subtract cash when going from equity value to enterprise value?
Model answer
EV represents the cost to acquire the operating business. Cash is a non-operating asset that an acquirer effectively gets back (it can be used to pay down the purchase or the debt assumed), so it reduces the net price. Conceptually, you net cash against the debt you're assuming.
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More from Enterprise & Equity Value
- What's the difference between enterprise value and equity value?
- Why is enterprise value capital-structure neutral but equity value is not?
- A company issues $100 of new debt and holds the cash on its balance sheet. What happens to EV and equity value?
- Which valuation multiples pair with enterprise value vs. equity value, and why?
- How do you calculate fully diluted shares?
- In one sentence each, define enterprise value and equity value.
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