medium · Principles of Finance time-value-of-money
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 already reflected in the firm's EBITDA figure.
- Because cash is a residual claim held only by preferred shareholders during the firm's eventual liquidation process.
- Because cash increases the overall financial risk of the firm, thereby requiring a higher equity risk premium be charged.
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