Question on Valuation
If a company has an enterprise value of 55 with 5 in cash. What happens to the enterprise value of the company if the CEO goes crazy and sets the cash on fire.
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The equity value decreases by $5
From a tactile formulaic perspective wouldn't EV increase since a decrease in cash is a double negative so 55 - (-5)=60 ?
The only reason EV changes is because it’s assumed any cash will be used to fund the transaction. You have $5m on hand? Great since I’ll own you let’s use that $5m to lower the price tag.
If the $5m is burned or whatever it’s basically like they spent it, so EV is just $55. There are usually closing documents that require minimal change in any financial figures that will materially affect the EV/transaction price between announcement and closing for reasons like this
Working capital peg, no?
i think it stays the same because (excess) cash isn’t an operating asset. Equity value decreases by 5 dollars and the cash decreases by 5 dollars in your bridge, making it a double negative and cancelling out the equity value decrease. EV stays the same, curious to know how u make ur balance sheet balance on the L&E side when this happens tho…
As another commenter suggested, Enterprise Value stays the same, whilst Equity Value decreases by $5m.
Enterprise Value is a measure of the value of the operating assets of the business only - in any acquisition, the valuation is anchored around the value of these operating assets (for example, factories).
Suppose that you think the widget factory (operating asset) itself (absent any cash) is worth $20m, and there is also $5m cash on balance sheet. You should be prepared to pay the owner $25m for both operating assets and cash. If the owner decides to pay themselves a $5m dividend before your acquisition, the $5m cash leaves the business, and you should only pay $20m.
lol, no wonder y'all aren't getting offers
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