The material notes that negative EV can occur for companies on the brink of bankruptcy.

• A. True.
• B. False.
• C. Only for banks.
• D. Only when cash balances are zero.

Answer: (A)

Enterprise value can be negative when a distressed company holds more cash than its liabilities, making the value of the firm as a going concern negative. EV is calculated as equity value plus debt plus minority interest minus cash. If the cash balance is very large relative to the sum of equity value and debt (and any other liabilities), the subtraction of cash can overpower the other components, yielding a negative number. This situation signals that, after paying off debts, there’s more cash left than there is value in the operating business, so a buyer might be better off liquidating the cash rather than continuing the business. It’s not limited to banks or to zero cash scenarios; a negative EV can arise for any firm in distress if the cash cushion exceeds the other value components. For example, if equity is worth 1, debt is 20, but cash is 25, EV = 1 + 20 − 25 = −4, illustrating how negative EV can occur.