There are two different methodologies here, which we shouldn't mix up. EV (as a multiple of earnings for M&A purposes) and DCF. In theory, they should lead to the same value. But in practice, they rarely do. Not because either is technically wrong, but because one is focused on price and the other on value. EV estimates what someone WOULD pay and DCF estimates what someone SHOULD pay.

It's just like the stock markets. You can create the most advanced and technically correct valuation methodology, but if the market uses PE ratios to make their investment decisions, your methodology will never be accurate in practice (unless of course it accounts for behavioural factors).

So, technically, you're right. Cash has a cost and should be valued accordingly. But in the case of EV, we're talking about what a business is worth today if sold. In the assumed transaction, the cash would either offset the sale price or be paid out. So it doesn't spend any time accruing interest in the assumptions made for EV.

Hopefully that makes sense.

Need a clarification. You said that equity issued purely to pile up cash will have no implicition on EV. Assuming that we use Discounted cash flow to calculate EV, wouldnt the Weighted Avergage Cost of capital change? Hence shouldnt the EV change?

+ In my conversations with other members of the finance community, I've noticed a lot of confusion between definitions for Total Enterprise Value and Enterprise Value. In theory, there shouldn't be a difference, and 'EV' more generally should represent the total amount of comparable capital at play (so total debt/cash being used to fund the business + the market value of the equity used to fund the business). However, if you've come across these two terms, it would be useful to hear your thoughts on the distinction?

+ You are absolutely right to suggest that in private equity, EVs are generally used to work back from say a traded comparable to a private investment. As such, it is therefore used to assess equity value, rather than the opposite. Nonetheless, a private placement at $12 (or $8) per share means a new transaction, and shifts us into the land of 'implied EV' – that is to say, the market value of all shares (not just the newly issued ones) will have changed to $12 from $10. If net debt/share was $5, then we could say that the implied EV has grown from $15 to $17/per share e.g. implied EV has increased?