Equity Multiple & Cash on Cash Return
Dear All,
I am struggling to calculate the equity return calculation and the cash-on-cash return.
My current understanding is as follows:
EMx = total cash flow to equity holders [total pre-tax net profit] + max equity invested / max equity invested
Cash-on-cash = annual cash flow to equity holders [pre-tax net profit] / max equity invested
Can someone kindly confirm whether the above formula's are correct?
Also, if I was to be asked in an interview (without a calculator), the following hypothetical questions, how would you go about answering them:
-
Calculate the equity multiple based on 100% equity purchase and a five year holding period?
-
Estimate the cash on cash annual return?
Any help on the above to try and make these concepts clearer and easier to understand and to use in an interview context would be most appreciated.
Many thanks,
Cash on cash - net cash flow divided by total equity invest at that time. As in, total equity that has been invested in the project. So if net cash flow is 100,000 and equity invest is 1,000,000. COC = 10%
Equity multiple - equity returned to investors divided by total equity invested over the life of the investment.
For Cash on Cash - is this the ANNUAL net cash flow divided by equity invested in that year?
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