Cash Question on DCF
Hello:
I had a quick question regarding cash and CCE for public companies. What sort of things fall under CCE? I've read a mixture of things, so is the consensus (Cash, Marketable securities, T-bills)?
Also, on a DCF, is only cash used, or CCE?
Thanks
you're right on the items you mention as part of cce. conceptually, the idea is that the line item represents short-term liquid assets that are unrestricted.
not sure exactly what you mean in terms of a dcf but i suspect it's in regards to moving from ev to equity value. for valuation purposes, you would discount your projected operating cash flows and terminal value back to the present and arrive at an implied enterprise value for the firm. when calculating equity value, you would strip out all non-equity claims for the firm based on the most recent balance sheet (market values for these is the correct number to use but rarely available). at this point you then add all non-operating assets back to get to the equity value. so yes, you add cce to the extent the line item is comprised of non-operating items (implication being that if there is a minimum level of operating cash required to run the business that is baked into cce, you strip that portion out as it is an operating item implicitly captured in enterprise value).
excess cash, marketable securities, and t-bills are all non-operating assets that you would add when calculating the equity value for the firm. hopefully this answers your question.
Perfect. Thank you so much man. Straight to the point. Understood!
Hi:
I just had one add-on question. So when doing a valuation, say we derive value per share from a couple assets (like say 4 assets). The following is a list of each's value/share:
Asset 1: $12 Asset 2: $6 Asset 3: $10 Asset 4: $8
To get the final price target/value for the stock, would we add only cash/share, or cash+cash equivalents/share?
Thanks
you add all non-operating assets to your enterprise value when walking from enterprise value to equity value. this means that you add cash and equivalents to get from ev to equity value. in instances where a company filing is more detailed and the company breaks out operating cash or restricted cash from excess cash and cash equivalents, you can delineate and only add excess and cash equivalents to get your equity value. as a practical matter, most modeling courses and high-level pitchbook models will make an assumption that the full amount of cash and cash equivalents is a non-operating asset that is added back. the importance here is not whether you add cash or cash + equivalents as a strict rule in all valuation, but on the underlying notion that enterprise value is reflective of a company's core operations to all stakeholders of the firm, while equity value is reflective of the entire firm (operating + non-operating) but only to the shareholders of the firm. if you keep this in mind when walking from ev to equity or vice-versa, then the exercise becomes a matter of looking at line items on the company's balance sheet and determining if an asset is operating or non-operating (core to the business going forward or not) and if a liability represents a claim on the company's assets or not (debt, pensions, preferred, etc.).
you can think of all the subtractions and additions to enterprise value on a per share basis if you'd like, though i would urge you to think about what you mean by asset/share. when you're looking at anything on a per share basis, your numerator should be a number that is for those shareholders. the value of assets 1 through 4 in your example above needs to represent a number that is net of all other stakeholders' claims. in other words, your asset value needs to be net of the appropriate liabilities and claims on the firm's assets. hopefully this is more helpful to you than it is confusing.
Ok, understood. I think I can make sense of it now considering your explaination of the fact that it should be the reader who checks the balance sheet to determine if they are operating or non-operating assets. Thanks again, value.
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