hard · Principles of Finance
When bridging from Enterprise Value (EV) to Equity Value, why is Cash subtracted from the total debt to arrive at Net Debt?
- Because cash is considered a non-operating asset that can be used to immediately extinguish a portion of the debt.
- To account for the fact that cash earns interest, which is included in EBITDA calculations.
- Because cash is a residual claim held only by preferred shareholders in the event of liquidation.
- Because cash increases the financial risk of the firm, requiring a higher equity risk premium.
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