In the EV formula EV = Equity Value + Debt + Preferred Stock + Minority Interest - Cash, what happens to EV if a company holds a large cash balance while other inputs stay the same?

In the EV formula EV = Equity Value + Debt + Preferred Stock + Minority Interest - Cash, what happens to EV if a company holds a large cash balance while other inputs stay the same?

• A. EV decreases
• B. EV increases
• C. EV remains unchanged
• D. EV equals cash

Answer: (A)

Cash is subtracted in the enterprise value calculation. When all other inputs stay the same and cash increases, EV falls by the same amount because you’re subtracting more cash from the sum of Equity Value, Debt, Preferred Stock, and Minority Interest. For example, with Equity Value 300, Debt 100, Preferred Stock 20, Minority Interest 5, and Cash 50, EV = 375. If cash rises to 100, EV becomes 325. So increasing cash reduces EV, and the effect is one-for-one with the cash change.

Cash is subtracted in the enterprise value calculation. When all other inputs stay the same and cash increases, EV falls by the same amount because you’re subtracting more cash from the sum of Equity Value, Debt, Preferred Stock, and Minority Interest.

For example, with Equity Value 300, Debt 100, Preferred Stock 20, Minority Interest 5, and Cash 50, EV = 375. If cash rises to 100, EV becomes 325. So increasing cash reduces EV, and the effect is one-for-one with the cash change.