Why do we subtract cash from the enterprise value (EV) formula?

The reasoning behind subtracting cash from the enterprise value (EV) formula primarily revolves around the concept that cash is immediately available to the purchaser upon acquisition. When calculating enterprise value, we aim to assess the total value of a business from the perspective of someone considering an acquisition, which includes all financial obligations as well as any available cash.

By subtracting cash, we account for the fact that when a buyer acquires a company, the cash on the balance sheet can be used to offset part of the purchase price. Essentially, it adjusts the valuation to reflect the net cost of acquiring the company, rather than providing a distorted figure that could inaccurately represent the financial dynamics at play. This approach ensures that the enterprise value gives a clearer picture of what an acquirer would financially need to invest to obtain the business after considering the available cash assets.

Thus, while all the choices contain elements related to enterprise value or cash, the primary significance of subtracting cash pertains to the immediate availability and utility of that cash in the acquisition process, making option C the correct choice.