CA Final New SFM – Equity Valuation Chapter SSEI Student
Formula of Enterprise Value in EVA is :
► EV = Market Value of Equity (+) Market Value of Preference Shares (+) Market Value of Debt (-) Cash and Cash Equivalents
Formula of Enterprise Value in MVA is :
► EV = Market Value of Equity (+) Market Value of Preference Shares (+) Market Value of Debt (-) Cash and Cash Equivalents
Query : Why is Cash and Cash Equivalents not deducted in MVA?
Please Help!
Hence, If the firm is sold to a new owner, the buyer has to pay the Market Equity value and must also repay the firm’s debts as per market value . & The buyer gets to keep the cash available with the firm, which is why cash needs to be deducted.
Hence , In MVA the valuation is done from the POV of Market and the Observer is concerned about the value of the company including the Cash and Cash equivalent and Hence he will add that into consideration ( Obviously he is not going to net off that cash ) as discussed in EVA. So C&CE is not deducted
Why he should pay the debt as per the market value what is the logic behind this can you tell me please
Also if the interest rate in the market rises it means the market value of debt decreases, would the lenders be ready to accept the repayment at lower value? Some might agree to sell the bonds at lower value since they could invest the money somewhere else at higher interest rate,but some might not due to capital loss