Enterprise value and Cash?

When calculating enterprise value you subtract cash but when calculating equity value you include the amount of the cash. Why does it seem to be excluded from the total firm value but included if you are valuing the stock??

If i was the seller, why would i subtract the value of my extra cash when determining my total company value? I wouldn’t just let you have it…wouldn’t i want the value of that cash included in the purchase price??


Cash is already accounted in the equity value. If we don’t subtract cash from EV then it will be double counting. Subtracting cash effectively lowers the price for the buyer to acquire the firm.

How is cash already in the equity value, at least not extra cash? If you added it, then that would be double counting.

Just seems odd that in finding total equity value from EV, you subtract debt and add back cash…but you subtract it when calculating EV…what am i missing there? I know excess/extra cash is always one of the last pieces to negotiate in a transaction, but if i was a business owner, assuming i leave enough in working capital, i would want to take that cash with me, and therefore included in my asking price…no?

EV is what someone would pay to acquire the firm. So for that purpose - the cash included in the EV is removed - assuming that the cash available is NOW with the acquirer and he would not pay for it (in that sense).

CPK, but doesn’t that cash belong to the equityholders…don’t you include it in determining total equity value? Just confused why you subtract it out for EV but add it back (and subtract debt) when finding equity value.

If you were a selling shareholder, wouldn’t you want your interest to reflect that extra cash in the value?


how much you need to pay to acquire the firm does not include the cash that the company has on its books.

Market Cap + Market Value of Debt - Cash.

Cash that is present during the process of acquisition can be used to pay down the outstanding debt.

(effectively reducing the market cap of the firm).

How does paying down debt reduce a firm’s market cap?

Any extra cash is effectively a non-operating asset. Do you not add back that cash (and any non-operating assets for that matter) when going from EV to equity Value?? Just seems odd that the equity value there would be more valuable then the inital equity value in the EV, no?? SHouldn’t the market cap reflect that cash?

Thanks for the help, CPK

wow thanks CPK thats wonderful video… i will never forget the concept now


How does paying down debt reduce a firm’s market cap?

Any extra cash is effectively a non-operating asset. Do you not add back that cash (and any non-operating assets for that matter) when going from EV to equity Value?? Just seems odd that the equity value there would be more valuable then the inital equity value in the EV, no?? SHouldn’t the market cap reflect that cash?

Thanks for the help, CPK

Think of it as what you would need for an all cash purchase of a company. If you buy all of the stock, you’d also be on the hook for all of the debt. So you have to add those two together. Now you own the company; your actual cash outflow, however, will be less since you also own the cash and marketable securities of the company. So you can now reduce your cash outflow by those amounts.

I guess I understand that to be the theoretical purchase price to acquire the company’s OPERATIONS.

But take Apple for instance…they have a boat load of cash on their balance sheet (which I know is the exception) but that cash is (should be) factored into Apple’s stock price. If you subtract that cash, you are effectively reducing the stock price by the per share amount of that cash. Do you think an Apple equity holder would sell for that amount…especially when it ignores the cash and the companies successful history of earning returns on that cash???

Guess there’s a disctinction btw EV, which is based on the value of the company’s operations, and equity value which might include cash and other non-operating asset/liability values…no?

A companies assets are valued at the market value of equity and the market value of debt (Assets = Liab + Equity). The EV tries to capture this relationship to give you a theoretical cash purchase price of the entire company, not just operations. To give you a simplified example, suppose I offer to sell you my car for $1,000 and tell you there’s $100 in the glove box for you to keep. How much cash will you be out of pocket to buy my car?

But you would be silly to either a.) not take the cash with you before sale or b.) not want to include that in the value of the car. Unless the $100 is already priced into the $1,000, why would anyone sell a car (company) worth $1,100 (operations=$1000 + cash=$100) for effectively $900 ?

EV is solely for the operating value of the company, you are subtracting the cash/nonoperating component.

By the same token is an acquiring company going to be allowed to “take the 100$ cash in the glove compartment” (which is exhaust / liquidate the extra cash on its balance sheet by paying perks to its owners e.g.) and then sell the company - at the same price that it was valued at before?

BMiller, Yep, that makes sense, I stand corrected. It has to be for the operating value of the company.

I also wouldn’t look at it as Right side (debt + equity) of the balance sheet for Left side (assets) because if you subtract out cash/marketable securities then right side no longer equals left side.

I think the distinction and summary is this (CPK/others please confirm):

1.) EV is essentially the “effective” value to acquire the on-going operations of a business. I say “effective” bc (using the car example above) you would still pay the asking price of $1,000 but once you own/pay for the car, you’re net cash position is -$900. So you “effectively” paid $900. You don’t pay the EV of $900, which is effectively equal to $800 after purchase…doesn’t make sense. You don’t pay the EV.

2.) To CPK’s last point. If you’re selling, you either distribute the cash pre-sale (take $100 out of glove compt) or ask for $1,100. If you ask for and get $1,000, then the buyer could step in, pocket the $100 and sell the car immediately for the same $1,000 price for a profit of $100.

Cash is the last stop at the negotiating table, so some of this is moot and gets thrown around when determing the final purchase price. Depends on working capital needs, history of reinvesting the cash, alternative investment environement, etc. But as a seller, I wouldn’t let ANY extra cash just line the buyer’s pocket. You either add it to the purchase price or don’t and let me take it on the way out. Apple’s stock price most certainly includes the value of its FAT cash pile, therefore you are paying for that cash when you buy a share in apple.

CPK (others), is this accurate?

Thanks everyone

what happens if co. is under bankruptcy proceedings and is reorganizing by selling.

just learn the point that “Cash is removed” and that is all that is relevant.

do not go too deep into it. none of us is a merger’s and acquisitions specialist. nor are we in any shape to say anything else. book says so, it is so.

CPK (or anyone else),

The math I get and the analogies (cash rebate) are nice, but can you help clarify.

Say Debt + Equity = $1,000 which includes the value of the company’s cash of $100…so EV = $900 which is the value of the Company’s total operations.

If i wanted to buy the company, would I pay $1,000 or the EV of $900 ??

If you pay $900 doesn’t that mean you effectively double-count the cash bc it’s reflected in your purchase price and you still have access now to the company’s $100, so you effectively pay $800 in that scenario. I would think you only pay $900 if you plan to let the seller keep the cash on their way out.


Do you pay $1,000 and once you own and possess the cash, what you’ve effectively paid is $900 ?

The second seems more realistic…that is, you don’t pay the EV. You pay $1,000 and essentially net the cash after the fact. You’d be a dumb seller if you sell for $900 and let the buyer also keep the cash.

So there’s really two ways of doing the same thing:

a.) you pay $1000 and keep the cash, effectively paying $900; or

b.) you pay the EV of $900 but let the seller take the cash

Disagree. EV = Debt + equity - cash.

EV is a proxy for the operating asset value of the firm…how can it be total asset value if you exclude cash (an asset)?

Cash is not a cherry on the cake…unless you’re dealing with a misinformed seller. Would you sell your equity stake in a company without the benefit of extra cash on the balance sheet.

EV is the the purchase price net of cash. You can either pay the EV and let the seller take the cash or pay the MVIC (Debt + equity) and you assume the cash on day 1 - either way, same net answer.

You think Apple’s humungous cash pile is not reflected in their stock price ?? Apple would not sell the company without compensation for the value of its excess cash…it’s no free cherry. Equity reflects cash.

I’m not at odds over your explanation…I just think the text is somewhat unclear.

They suggest that EV is the theoretical take-out price, which it is, but that number is net of cash. They explain that as a buyer you assume full right and value of the cash upon acquisition, and therefore it effectively lowers your purchase price. That’s fine. But to me it makes it sound like you pay EV (which is already net of cash) and then walk-in on day one and still assume the value of the cash. If you pay EV, then that would have to imply that the seller walks out with the cash, otherwise the buyer is getting the benefit twice, once in the purchase price and once after they take control.

It’s really a net cash take-out price.