if MVequity=100 and cash =20, how much should I pay for this company?
The EV equation would imply EV=MVequity - Cash =80
I dont get the concept of why I would be paying $80 and I would be receiving stocks worth 100 and Cash worth of 20.
When there is debt, I would understand the cash can be used to pay down debt. However, what is the rationale when there is no debt?
Thanks
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It's not necessarily used to pay down debt, extra cash simply decreases your cash purchase price. You pay $100 in cash for equity, which consisted of $20 in cash. So with your $100 you are buying $80 of company and $20 of cash. You pay 100, but receive 20 the same day, so your net cash outflow is 80.
EV is theoretically the npv of future free cash flows to the firm - owned by both debt and equity holders. Cash that has already been earned doesn't matter, the firm's value is dependent solely on the cash it will generate in the future. In this case, the net present value of future free cash flows to the firm is 80 (firm value or EV).
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A firm has 100 in equity, 40 in debt and 20 in cash.
To acquire it, you need to pay 100 to the equity holders and 40 to the debt holders (total 140), and you will receive 100 of equity and 20 of cash (total 120). Since you paid 140 and received 20 in cash you effectively paid 120 (i.e., 140 - 20 = Equity + Debt - Cash)
lets take this example *Company A: MVequity =100 ; Cash =20 *Company B: MVequity = 100
To acquire B, you pay 100, and you receive equity worth of 100 To acquire A, you pay 100, you receive equity worth of 100 and cash amount of 20, so you effectively paid $80
So what this is saying is that is that if everything equal, if a company has more cash, I should pay less. Which contradicts some common sense, that i company with MVequity =100 and Cash of 20 should ask more for more money than a company with MVequity of 100.
so there is something definitely wrong in the analysis or I am missing a different aspect of the analysis
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The two companies in this example do not have the same value. Company A's EV is 80, B's is 100. The shareholders of company A also have claim to $20 in cash, so their equity value is company + cash (80+20).
Maybe the interplay between EV and equity value is confusing you. When you acquire a company's equity, you are acquiring ownership of a future stream of cash flows (Enterprise Value). The actual firm value to you, the equity holder, is contingent on two primary areas (negating preferred & MI): what portion of the cash flows are owned by another party (debt holders) and how much cash that you can take from the business on day 1. Let's look at a couple of scenarios:
Company with 80 EV and 20 Cash...The cumulative present value of future cash flows is worth 80, and you can pay yourself a cash dividend of 20 today. The value of equity in this company is 100
Company with 80 EV, 30 Debt, 20 Cash...Cash flow stream is still worth 80. Now, 30 of those cash flows are owned by debt holders (which take precedence over you). At the same time, you own 20 in cash, which you can use to buyback some ownership of those cash flows (paydown debt) or pay yourself a dividend - doesn't matter. Regardless, the value of equity in this company is 70 (80 - 30 + 20).
In both of these scenarios, the company is worth $80 (EV). equity value changes based simply on how cash flows through to shareholders. This is why, all else equal, if two companies have the same equity value, the one with less cash has a higher enterprise value - the company is worth more.
For company B, the value of the discounted future cash flow is 100. Market thinks the company is making more in the future, therefore you pay more out of pocket.
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Another interesting spin on this (that I don't believe anyone mentioned) is that cash is implicitly factored into your EV; so you don't want to double count cash in your EV computation. If you think about setting up a DCF in order to calculate an implied intrinsic share price, you are factoring in Cash into your equity value by using the FCF metric to compute it. I hope that adds some insight to your newly acquired perspective!
Not sure if I follow. Well yes cash is included in equity value but is not in FCF.
with FCF you calculate EV which captures operating assets. So cash is not included there. Then you adjust it and come to equity value. But the DCF itself does not incorporate a non operating asset such as cash. Are we saying the same thing?
FCF by definition is post-reconciliation of Net Income back to (Free) Cash. You remove Cash balance from EV so you don't double count it, because Cash has already been factored in implicitly into the EV through use of FCF to get there. It's just another way to think about it.
We're talking about cash already on the balance sheet. EV is cash the company will generate in the future, yes, but cash on the balance sheet has already been earned. That reason is not why you take cash out.
Pardon me if I am missing something in your example but...the usual simplified formula for EV is EV=MVEquity - Net debt. Assuming you have no debt, net debt is negative by the cash amount. So EV is 100 - (-20), which is 120 not 80?
EV = mv equity + net debt
Net Debt = Gross debt - cash EV=MVequity + Gross Debt - Cash EV=100 + 0 - 20 =80
My bad
HOW THE FUCK IS THIS THREAD STILL HAPPENING
Are you sure finance is for you? This is some pretty basic stuff here.
a) you pay for the business (-100), get cash (+20), for net outflow -80 b) what is happening to WSO. Where are the days of yore with hardcore finance nerds crushing work but still always shitfaced and banging a new bish each week
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