Why would you subtract only excess cash from EV rather than all cash?

• A. Because cash is a non-operating asset and the buyer would receive the seller's cash; only excess cash should be subtracted
• B. Because cash is always part of debt
• C. Because subtracting all cash would understate EV
• D. Because cash represents working capital

Answer: (A)

Enterprise value is the price to acquire the ongoing business, excluding the cash that the seller would take with them at closing. Cash on the balance sheet is a non-operating asset from the buyer’s perspective, so only the excess cash—cash above what’s needed to run the business and cover normal working capital needs—should be subtracted. This ensures you’re valuing the operating assets of the company, not the cash the seller can take away. Subtracting all cash would misstate the value by removing cash that’s necessary for operations, and cash is not the same thing as working capital.