Hi there,
Let's assume companies had to pay interest on cash sitting in their bank accounts, resulting in annual interest expenses for cash, i.e. cost of cash.
Damodaran defines debt has having the following characteristics: 1) Commitments to make fixed payments in the future 2) Fixed payments are tax-deductible 3) Failure to make payments can lead to either default or loss of control of the firm to the party to whom payments are due
In Switzerland, the cost of cash is tax deductible, so the 2nd premise of debt would hold for cash. I'm not sure about the 1st and 3rd premises, and their applicability in this case, but let's reserve that for the discussion later.
In this case, cash would not accrue to equity holders but would represent a claim on the equity ( just like debt does). Hence, I would not deduct cash when bridging from EqV to EV. Does this make sense?
So you make an interesting argument. The problem is cash is still an asset and I don't know why you would assume to put interest expense on cash as many companies invest cash in liquid securities, hence cash and cash equivalents. Second, cash still isn't debt because you still don't have a claim on the assets (not equity) like you do from debt. And third, we deduct cash because cash can be used to pay off the debt in the event of a sale of the company.
Et temporibus est accusamus ad ipsa molestiae. Et placeat et dolorem reprehenderit. Ut eius qui tempora tenetur commodi et eveniet.
Est distinctio et repellat quis. Labore eum ut voluptatem id non rerum. Et deleniti in consequatur unde sunt perspiciatis et nostrum. Quaerat rerum rem sapiente quae aut omnis.
Sunt praesentium error natus voluptas. Possimus itaque nihil nobis quia. Aspernatur maxime sed commodi doloremque voluptatem molestias. Omnis totam optio sit tempore placeat dicta inventore asperiores. Quis iure enim magni dolores aut ratione quasi. Voluptas facere vel dicta et earum voluptatum nisi. Quia quo voluptatum illo est et.
Velit alias facere commodi omnis. Dicta sequi facilis et reprehenderit. At saepe aut cum assumenda facilis consequatur sapiente sint.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...