Equity Multiple & Cash on Cash Return

ed666's picture
Rank: Senior Monkey | 77

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:

  1. Calculate the equity multiple based on 100% equity purchase and a five year holding period?
  2. 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,

Comments (4)

Dec 2, 2017

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.

    • 1
Dec 2, 2017

For Cash on Cash - is this the ANNUAL net cash flow divided by equity invested in that year?

Best Response
Dec 2, 2017
  1. Sum of (net operating cash flows + sales proceeds) / purchase price (if 100% equity financed)
  2. Since you are unlevered at 100% equity financing, figure out what your annual net income is and divide that by your purchase price; that is your COC. If they give you your acquisition cap rate, that will also be your cash on cash. Unleveraged cash on cash is equivalent to your cap rate in year 1.
Dec 2, 2017
Comment
    • 1