Which combination of factors can lead to negative enterprise value according to the material?

• A. A very large cash balance and a very low market cap.
• B. A very high market cap and very little cash.
• C. Consistent cash flows without any debt.
• D. High revenue with negative net income.

Answer: (A)

The main idea here is that enterprise value reflects the true takeover cost of a company, and it can become negative when a company holds a lot of cash relative to its equity value. Enterprise value is basically the value of the business to a buyer: you start with the equity value (market cap), add debt and other obligations, and subtract cash. If the cash pile is enormous compared with a tiny market cap, subtracting that cash can push the total below zero. For example, if market cap is small but the company has a large cash balance and little debt, the calculation can yield a negative enterprise value, meaning the cash on hand would more than cover the underlying equity value and debt, making the intended purchase effectively cash-positive for the buyer.

The other scenarios don’t create a negative EV because either the equity value is large enough to offset cash, or the cash level isn’t sufficient to overpower the other components, or profitability alone doesn’t determine EV. A high market cap with little cash keeps EV positive; consistent cash flows without debt suggests a solid, not negative, EV; and high revenue with negative net income doesn’t automatically make EV negative since EV hinges on balance sheet values more than income here.