Why is cash subtracted from enterprise value?

• A. Cash is considered a non-operating asset and the buyer would receive the seller's cash, so EV should minus cash
• B. Cash is always treated as debt
• C. Subtracting cash increases EV
• D. Cash has no effect on valuation

Answer: (A)

The value of a business’s ongoing operations is what enterprise value aims to measure, and cash is a non-operating asset that the buyer would take control of at closing. Because the buyer can use that cash immediately (to pay down debt or fund other needs), it shouldn’t be counted as part of the cost to acquire the operating business. That’s why enterprise value subtracts cash: EV equals equity value plus debt minus cash, isolating the value of the core operations from the cash on hand.

For example, if a company has equity value of 140, debt of 0, and cash of 100, the enterprise value is 140 + 0 − 100 = 40. The buyer would effectively pay 40 for the operating assets and would receive 100 in cash at closing. If there were no cash, EV would be 140, reflecting only the value of the operating business.