Cash is already accounted for within Market Cap. why?
I found a very similar content on wso forum but still is not clear tho. For enterprise value, we subtract cash. I see it because the cash is Non operating asset and enterprise value only takes operating asset into account. But Why Equity? WSO says equity already has cash in it... BUT, for enterprise value, we DO NOT use shareholders' equity, but instead, we USE "Market Cap." or equity value from valuation.
I see shareholders' equity on BS shows it includes Cash as E=A-L. BUT.. again.. the one in enterprise value formula is NOT shareholders' equity, BUT market Cap....
Market Cap. is Price*shares.. where is cash here?
Or, suppose we use DCF to find the equity value, but for equity value we use levered free cash flow which uses EBIT, capturing only operating parts... NO NOA...
Any kinds of answer would be helpful. Thank you so much in advance.
From reading through and watching a lot of the BIWS material, the answer I've come to understand is:
EV = Equity Value + Debt - Cash + Other Important Items that I don't want to list out
EV is the Value of a Company's Core-Business Assets to all of its Investor Groups. Equity Value is the Value of Core-Business Assets + Value of Non-Core-Business Assets to only Equity Investors
So the Market Cap is, which is used for Equity Value, the value for all of a company's operating and non-operating assets.
But since Enterprise Value is the value of only Core-Business/Operating Assets to all Investors, to go from Equity Value to EV, you subtract Non-Operating Assets (ex. Cash, Short-term Investments, etc) and add the items that are claimed by other Investor Groups (Debt).
Was that clear?
Thank you so much for the explanation!!! helped a lot!!!
This is awesome
You seem to be extremely confused by all of this equation stuff, but I'm having a hard time understanding where you went wrong. So let's break it down by each of your statements:
"For enterprise value, we subtract cash. I see it because the cash is Non operating asset and enterprise value only takes operating asset into account."
The reason that we subtract cash from an EV calculation is simply that cash essentially becomes a source of funding when we acquire the company that owns that cash. E.g. when we acquire a company for $10 billion and it has $1 billion in cash, we only had to pay $9 billion since we can literally use the same $1 billion cash to fund the acquisition activity.
"But Why Equity? WSO says equity already has cash in it... BUT, for enterprise value, we DO NOT use shareholders' equity, but instead, we USE "Market Cap." or equity value from valuation."
Market cap is the same as shareholders' equity.
Thank you for the explanation! yup.. I AM so confused hahaha.. :,(
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