Why FV = Market Cap + Interest Bearing Debt - Cash and not FV = Market Cap + Interest Bearing Debt + Long Term Liabilities ...

N96k2q2NVy's picture
Rank: Baboon | banana points 143

Hi,

Got a small question:

Why is it that FV = Market Cap + Interest Bearing Debt - Cash

and not

FV = Market Cap + Interest Bearing Debt + Long Term Liabilities + Current Liabilities - Cash - Other Current Assets

After all, the second formula would account for all the Liabilities - all the ways to "easily" reduce them (/pay out Div. reducing Market Cap)

Thank for your help,
Chris

Investment Banking Interview Course

  • 7,548 questions across 469 investment banks. Crowdsourced from over 500,000 members.
  • Technical, behavioral, networking, case videos, templates. All included.
  • Most comprehensive IB interview course in the world.

Comments (5)

Feb 3, 2013

Short answer - because those other assets/liabilities are part of the "firm".

Feb 3, 2013
Angus Macgyver:

Short answer - because those other assets/liabilities are part of the "firm".

Well but I could easily convert cash to current Assets... That would change the FV which makes it less comparable!

Feb 3, 2013
N96k2q2NVy:
Angus Macgyver:

Short answer - because those other assets/liabilities are part of the "firm".

Well but I could easily convert cash to current Assets... That would change the FV which makes it less comparable!

Not 100% sure what you mean, but you would make adjustments for excess net working capital (not incl cash), which should account for that.

Feb 3, 2013
valuationGURU:
N96k2q2NVy:
Angus Macgyver:

Short answer - because those other assets/liabilities are part of the "firm".

Well but I could easily convert cash to current Assets... That would change the FV which makes it less comparable!

Not 100% sure what you mean, but you would make adjustments for excess net working capital (not incl cash), which should account for that.

These guys have got it. This is nitpicky but I think the TEV calc should actually be Mkt Cap + Debt - EXCESS cash, so you don't necessarily get to subtract all that cash - management sometimes comments on the minimum cash balance.

Another tidbit that might help is that one "interpretation" of NWC is the "stuff you need to run the firm" - inventory, cash/AR, prepaids, etc. net of AP and other current liabilities. As the valuationguru said, if there is excess NWC (beyond what you would "need" to run the firm) you would account for that in the purchase price.

Helpful?

if you like it then you shoulda put a banana on it

Feb 3, 2013