I’ve seen in some books that cash & equivalents are treated as non-operating assets and added back to get enterprise value. How should they be handled in CFA exam? Thanks!
I remember EV subtracting cash and investments in the EV/Ebitda ratio questions (I believe in fixed income).
I think it is only EXCESS cash that is taken out. That would be the cash (and marketable securities) that are not needed for the ongoing operations of the company. It wouldn’t be the full amount of cash on the balance sheet.
subtract cash and marketable securities from EVA, add to fcff and fcfe models when seeking to purchase a control position. That’s my understanding.
Yes, in theory, only excess cash should be excluded. However, in reality, it’s hard to tell how much is necessary for ongoing operations. I don’t think Schweser Notes address this issue.
Schweser has it under a “Professors Note”. I can see the page in my mind. Anyway, that note says that on the exam you will be given EXCESS cash in the question.
Thanks mwvt! I’ll recheck my notes.
the cfai texts mentionednit but never used excess cash in the examples or questions, they just used cash, but I agree with the point, best practice would be to analyze the information given and react accordingly with that distinction in mind.
So for FCFF calculations such as NI + D + I(1-tax) -Fcinv -NWCinv we remove excess cash, marketable securities or land held for investments but for firm value: firm value = FCFF1 / (WACC - g) we add excess cash, land held for investments, etc? or do we add excess cash to both?
What text book are you reading??
nvm, I found the answer, its the same thing. I’m using the secret sauce.
Black Swan Wrote: ------------------------------------------------------- > subtract cash and marketable securities from EVA, > add to fcff and fcfe models when seeking to > purchase a control position. That’s my > understanding. Swan - when you say subtract from cash EVA, I’m not totally following that. Can you elaborate further?
Enterprize Value - You are buying the company. so you have to pay off equity, debt, preferred stock. So, total payment is debt+ps+equity but you can use the current account cash to pay off in part. So, you will be paying the remaining amount. So ur net payment would be debt+ps+equity-current cash balance
exactly tom, this is a topic that only gets a very light reference in the CFAI and schweser books but is fairly important, very easy to miss.