Hello AF pals I have a doubt regarding the definition of Enterprise value. The formula says that it is market value of (common stock+preferred stock+debt) + Minority interests - Cash and investements. Why is it required to subtract cash and investments
because when u buy a firm, their cash is now yours. if u add cash, u are paying for what is now your own cash, which wouldnt make sense
there was an example a couple of days ago with the same issue: assume you buy a bottle of coca cola (USD3) with a USD5 note attached to it. how much do you wanna pay for the bottle? you should pay 3 and not 8. right?
I think you’d pay minus 2 actually :-). If coke starting selling bottles for $3 with a $5 bill attached they would be going out of business fast!
Hope that eases the bowels a bit. http://www.analystforum.com/phorums/read.php?12,905347,905598#msg-905598