Valuation "riddle"

upperechelon | 16:25 Thu 13th Dec 2007 | Business & Finance

4 Answers

So all other things being equal.

Is a company with $20MM in cash on the balance sheet worth the same as one with $5MM in cash on the balance sheet?

Why?

checking on a charity

loans

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squarebear

Nope. The first one is worth $15MM more than the second one. Assumming MM is a form of currency.

upperechelon

Question Author

but wouldn't that contradict its enterprise value, which should be lower than the one with less cash?

squarebear

No because you said all things being equal in your question. So the first business is doing better by $15MM

upperechelon

Question Author

But that doesn't mean it is necessarily valued as 15MM more. Enterprise value would suggest it is valued as 15MM less.
The rate of return on the one with 15MM more would also be less, as they have a less efficient use of their cash in generating revenue if all else is the same.
It's a riddle test my boss gave us analysts and all of us have come up short thus far.
How would the two companies compare in acquisition prices therefore?

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