A company finds a briefcase with $100,000 in cash, and it now belongs to them. What happens to the company's enterprise value, and why?
Please explain why the company's enterprise value does or does not increase. I appreciate any help!
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EV stays the same. $100,000 cash causes Equity value to increase by 100k but is offset by subtracting 100k cash or the decrease in net debt, so there is no change to EV.
Of course. The shareholders own the assets of the business, less its liabilities. Any time you increase an asset without an offsetting liability, you increase equity value. A = L + E.
If you're looking through the lens of discounted cash flows to determine equity value, consider this a one-time flow of $100k at time=0.
You're right, but the deferred tax liability is actually t*cash to make everything balance. Just checked the math with t = 40%:
Deferred Tax
Income Statement Pre-Tax Income +100 Income Tax Provision +40 Current Portion of Taxes +0 Deferred Portion of Taxes +40 Net Income = Pre-Tax Income - Income Tax Provision +60
Cash Flow Statement Net Income +60 Deferred Portion of Taxes +40 Cash = Net Income + Deferred Portion of Taxes = +100
Balance Sheet Cash +100 Deferred Tax Liability +40 Retained Earnings +60
Immediately Pay Taxes
Cash +60 L&E +60
No Taxes
Cash +100 L&E + 100
No matter if you ignore tax, assume deferred taxes, or immediately pay taxes, enterprise value stays the same as any gain to liabilities and equity is offset by subtracting cash.
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