In an unlevered DCF, which item might be treated as a non-operating asset to adjust to equity value?

In an unlevered DCF, which item might be treated as a non-operating asset to adjust to equity value?

• A. Cash
• B. Accounts payable
• C. Inventory
• D. Property, plant, and equipment

Answer: (A)

In an unlevered DCF, you’re valuing the enterprise value (EV) based on the firm’s core operating assets and cash flows available to all capital providers. Cash is considered non-operating because it isn’t needed to run the business day-to-day; it sits outside operating activities. When you convert EV to equity value, you adjust for the capital structure by subtracting debt and adding cash: Equity Value = EV − Debt + Cash. That’s why cash is treated as a non-operating asset to adjust to equity value. The other items are tied to operations: accounts payable is a operating liability, inventory supports production, and property, plant, and equipment are the core operating assets used to generate cash flows.

In an unlevered DCF, you’re valuing the enterprise value (EV) based on the firm’s core operating assets and cash flows available to all capital providers. Cash is considered non-operating because it isn’t needed to run the business day-to-day; it sits outside operating activities. When you convert EV to equity value, you adjust for the capital structure by subtracting debt and adding cash: Equity Value = EV − Debt + Cash. That’s why cash is treated as a non-operating asset to adjust to equity value.

The other items are tied to operations: accounts payable is a operating liability, inventory supports production, and property, plant, and equipment are the core operating assets used to generate cash flows.