Hey all, need your help to solve my stupid question…when calculating EV, why it not inculde those account payable, account receivable, inventory.etc…?? Thanks a bunch !!!
If I remember this accurately, It doesn’t include cash, cash equivalents and investments. It would actually include other working capital. The reason why it doesn’t include cash and cash equivalents in because when you acquire the company those funds are then available to be paid out or used. If you pay 20 bucks to get 20 bucks, then you didn’t really pay for anything. As for the investments, it’s because they signify a claim on assets which are already consolidated into other companies. They aren’t really part of the EV of the firm. There are probably arguments for including it, but it won’t be on the exam.
to add on to what grumble is saying - when you value a firm you are valuing all the cash flow producing assets and cash equivalents or things held for investment are not creating any value or cash flows, so your valuation does not include them.
in general when you buy a company, you pay the market price, but you get to keep the cash and you have to pay its debt.
Thank you guys for all the great helps!!! BUI i stil don’t get it why we are not adding inventory, property and equipments, etc…when value the company? Aren’t we suppose to pay for those assets as well and consider as part of company value?
@persistence622 You indirectly add inventory, property, etc. Think about it: EV = Market Value of Equity + Market Value of Debt - Cash & Investments Assets = Equity + Liabilities So, when you add equity and debt you indirectly take into account approximately the asset side of the balance sheet which includes property, inventory, etc.