Articles, Valuation, Valuation Cases

An investment Banking View of Enterprise Value

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By Gilbert E. Matthews, CFA, Sutter Securities, Inc. (San Francisco, Calif., USA)

Should cash be deducted when calculating enterprise value?

The valuation community currently uses two different approaches to calculate Enterprise Value (EV) as the numerator for multiples in the guideline company and acquisition methods. EV is sometimes defined as debt plus equity and sometimes as debt plus equity minus cash. We believe that in calculating EV, cash should be deducted. The valuation literature reflects this disorder: some writers exclude cash from the definition, while others (including the author) state that cash should be deducted. Pratt writes that both are acceptable approaches. We set out to see what investment bankers actually do in practice. We then set forth our reasoning as to why the valuation profession should adopt what is the overwhelming investment banking practice: to deduct cash when calculating EV. We also discuss other factors to be considered in the determination of EV.

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