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Enterprise value and non-operating assets

Hi everyone. Currently I’ve faced problem with understanding of EV concept. So basically EV = value of operating assets + value of non operating assets. As far as I understand, when applying DCF approach we start with FCFF/WACC value, then add value of non operating assets: marketable and equity securities, excess cash flow, unutilizied assets and so on.

But at the same time, almost every source I’ve came across stated that EV should be calculated this way: EV = EqV + Debt + NCI - Cash and Marketable securities. So I get every element of the formula except for the latest since we can treat it as non operating assets.

So that’s the point? Why in one way non operating sould be added, in another one should be substracted? It really seems confusing for me. Thanks.

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bluebella404 wrote:

Hi everyone. Currently I’ve faced problem with understanding of EV concept. So basically EV = value of operating assets + value of non operating assets. As far as I understand, when applying DCF approach we start with FCFF/WACC value, then add value of non operating assets: marketable and equity securities, excess cash flow, unutilizied assets and so on.

Are you sure here was EV and not Firm Value? Because Firm Value indeed considers operating assets and non-operating assets as you say (cash in excess of operating cash, marketable securities, unutilized assets, etc).

In case you are right, can you provide the source of that statement, please?

bluebella404 wrote:

But at the same time, almost every source I’ve came across stated that EV should be calculated this way: EV = EqV + Debt + NCI - Cash and Marketable securities. So I get every element of the formula except for the latest since we can treat it as non operating assets.

So that’s the point? Why in one way non operating sould be added, in another one should be substracted? It really seems confusing for me. Thanks.

This is the most correct formula for EV and there are a lot of sources explaining its logic. If you have doubts about it, we can discuss further.

BR

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Thanks for shedding some light on. 

I’ve seen this interpretation in McKinsey Valuation book. So as I suppose in that case EV = Firm value, some authors use them interchangeably, I guess.

Ok, but still, I really don’t get the definition of firm value. Where it could be used?

I know that EV is some kind of rough approximation of a  purchase price when a company is being acquired.

Equity value is used as a estimated stock price value, for instance, in consensus estimates. And this is like a good proxy for minority interest value.

But what about firm value? Thanks in advance.

Practically speaking in an acquisition the seller would sweep or retain excess cash before closing. Thus the excess cash is part of the intrinsic value, but does not need to be factored into the amount a buyer needs to raise and deliver to close the acquisition.