Messages: What Members Are Asking On-Line
by CI Staff
What is the correct definition, and what is the correct amount?
—L.J.CI Editor Responds: Both the definition and example in the table are correct. Cash of $216.0 and short-term investments of $340.3 are used to reduce the enterprise value. The equation for enterprise value is market cap + interest-bearing debt – excess cash. For our example:
Market cap is $3,680.4,
Interest-bearing debt is $0.0
Excess cash is $216.0 (cash & equivialents) and $340.3 (short-term investments)
One could write the equation a number of ways:
$3,680.4 + $0.0 – $216.0 – $340.3, as shown in Table 1, or
$3,680.4 + $0.0 – ($216.0 + $340.3)
Either way, the end result is the same:
$3,680.4 – $216.0 – $340.3 = $3,124.1
$3,680.4 – $556.3 = $3,124.1
—W.S.CI Editor Responds: The key is to break down the cash between “cash for business” and “excess cash.” For our example, we allocated all of the cash ($216.0 million) as excess cash. Therefore, none of the cash was allocated toward cash for business. The excess cash was then used for the determination of enterprise value. If one could determine how much of the cash was needed for normal day-to-day operation, then you would split the cash allocation between the two proper sections. In this, case, we are unable to make that distinction.