Just studying technicals right now but what is the equation for EV? I am finding 3 different equations, some that include the subtraction of cash and some that don’t. what’s the actual formula and why are there different equations that include/exclude cash from the equation?
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I like to think of enterprise value as "lock, stock, and barrel" value. If you wanted to own the whole enterprise free and clear, what would it cost to do that?
You would need to buy the common stock ("stock"). You would need to repay/buy all of the debt, because businesses with debt are not "free and clear." Same with preferred stock. You would also need to buy out all of your business partners, so minority interest.
Cash is only slightly more complicated. Let's imagine that a kid is running a lemonade stand. He sells lemonade for $1, but sometimes people don't carry $1 bills, so he keeps change of $100 worth of bills to facilitate transactions. That $100 is working capital and is necessary to run the business. If he didn't have the $100, fewer people would be able to make the lemonade purchases because they would lack the tender to do so. The $100 is necessary.
Now imagine the same scenario, but the kid also has a million dollars in the bank. You don't need a million dollars to run a lemonade stand, you just need the lemons, the stand, and the money for making change. So for the lemonade stand, enterprise value = Buy out the Kid's Equity + Repay All Debt + Preferred Stock + the Kid's Sister's equity (minority interest), inclusive of Operating Cash ($100 that is necessary, not the $1M that isn't).
Cash on enterprise value is an operating/nonoperating question.
Thank you so much for such a detailed response, your example helped me understand!
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