In a DCF valuation, what is subtracted from enterprise value to derive equity value?

In a DCF valuation, what is subtracted from enterprise value to derive equity value?

• A. Net working capital
• B. Total debt
• C. Cash on hand
• D. Net debt

Answer: (D)

In a DCF valuation, the enterprise value represents the value of a company’s underlying operating assets funded by both debt and equity. To arrive at equity value, you account for the company’s net obligations to debt holders after considering its available cash. Net debt is defined as total interest-bearing debt minus cash and cash equivalents. Since enterprise value equals equity value plus net debt, subtracting net debt from enterprise value gives equity value. Subtracting total debt would ignore the cash the company already holds, and subtracting cash alone ignores the debt that must be paid, so net debt is the correct adjustment.

In a DCF valuation, the enterprise value represents the value of a company’s underlying operating assets funded by both debt and equity. To arrive at equity value, you account for the company’s net obligations to debt holders after considering its available cash. Net debt is defined as total interest-bearing debt minus cash and cash equivalents. Since enterprise value equals equity value plus net debt, subtracting net debt from enterprise value gives equity value. Subtracting total debt would ignore the cash the company already holds, and subtracting cash alone ignores the debt that must be paid, so net debt is the correct adjustment.