A Valuation Question - unexpected cash found at Year 0

I recently interviewed with a top M&A house and one of the interviewers asked me this question:

"There is a firm with Equity of $100 and EV of $150. If you suddenly found a $200 cash which was unknown at the time of valuation, how would be the effects of this extra cash (at Year 0) if any?"

I was not able to answer this question correctly... please help! Thanks guys!

Comments (7)

Aug 21, 2015

BUMP

Aug 21, 2015

NOTHING. IT WON'T AFFECT THE ENTERPRISE VALUE. Bang. Answered your question.
WHY?
The more profitable a firm is the more EV it has.
Cash itself doesn't increase its fundamental ability to operate profitably.

Aug 21, 2015

lol whoever gave me Monkey Shit should explain why my answer is wrong. I hope the OP isn't ungrateful enough to shit on someone who took the time to answer his question.

Aug 21, 2015

equity value increases by 200. Enterprise value is unchanged....it represents the value of the company's operations and not non-operating assets like cash.

Another way of looking at it (lets assume the company has 50 debt and previously had 0 cash):

Before:

EV = Equity + Debt - Cash
150 = 100 + 50 - 0

After:

EV = Equity + Debt - Cash
EV = (100+200) + 50 + (0+200)
EV = 150

Aug 22, 2015

I am confused!

If equity value to enterprise value includes adding debt and subtracting cash. If you have find cash of 200, wouldnt the EV go negative?

Despite this question: Can EV ever be negative? if so when?

Aug 22, 2015

the EV of a firm is dependent on future cash flows. how much equity holders are entitled to the EV is determined by the Net Debt of the company and cash is part of it.

Aug 22, 2015
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