In simplifying the enterprise value calculation, replacing debt with net debt and removing the subtraction of cash implies what?

In simplifying the enterprise value calculation, replacing debt with net debt and removing the subtraction of cash implies what?

• A. Cash is already accounted for within net debt
• B. Cash is ignored completely
• C. Debt increases by cash
• D. EV becomes meaningless

Answer: (A)

The idea is that cash and debt are combined in one number called net debt. Net debt equals total debt minus cash. So when you use net debt in the enterprise value calculation, you’ve already baked cash into that figure. If you also drop the separate cash subtraction, you’re not ignoring cash; you’re relying on net debt to reflect cash’s impact. For example, with debt of 100 and cash of 20, net debt is 80. Using equity value plus net debt gives equity value plus 80, which matches the result you’d get from equity value plus debt (100) minus cash (20). So cash is already accounted for within net debt.

The idea is that cash and debt are combined in one number called net debt. Net debt equals total debt minus cash. So when you use net debt in the enterprise value calculation, you’ve already baked cash into that figure. If you also drop the separate cash subtraction, you’re not ignoring cash; you’re relying on net debt to reflect cash’s impact. For example, with debt of 100 and cash of 20, net debt is 80. Using equity value plus net debt gives equity value plus 80, which matches the result you’d get from equity value plus debt (100) minus cash (20). So cash is already accounted for within net debt.