I understand why cash is subtracted when determining enterprise value, so other things equal - enterprise value will be less than invested capital (debt+preferred/common equity) by the cash amount. My question: if you’re solving for EV and exclude the cash from working capital in your DCF (that is, exclude from WCInv), that results in a higher value than if you include cash in working capital. Doesn’t this contradict my first stmt ? In which case EV will be larger than invested capital. What am I missing? Many thanks!!!

When using DCF I don’t think you exclude cash. That would be subtracting cash twice.

Not sure I follow. Cash is captured through your (incremental WCInv) working capital. My understanding, and as the book shows, you exclude it when finding EV, and including cash would yield an invested capital result. However, excluding it would yield and enterprise value that’s higher than invested capital bc your WCInv doesn’t reduce cash-flow as much. This seems odd bc I thought EV

Wait a minute. What’s the formula of WCInv?

For 2009 with simplified case isn’t it this?

WCInv = [A/R(2009) + (Inventory 2009) - A/P(2009)] - [A/R(2008) + (Inventory 2008) - A/P(2008)]

Isn’t cash already excluded? In DCF we use WCInv in FCFF or FCFEE and we use CFO there as cash because it isn’t captured in WCInv.

Not sure I get the CFO part. But your formula is correct, it excludes cash which means it would be appropriate for the WCInv adjustment when finding EV. If instead you were to include the cash component in WCInv, the result would be a lower value that is equal to market value of invested capital. It is lower bc you are now subtracting a larger working capital adjustment annually…