Any cash and cash equivalents more than required in the operations of the business is considered as excess cash. You can estimate the cash required in the operations of the business is considered as excess cash in two ways. We discuss “How is excess cash treated in your DCF valuation?”
Excess cash is added to the DCF value arrived at in your DCF valuation exercise.
We add excess cash back to the value arrived at using the DCF value because excess cash was not required to run the business and generate the cash flow by definition. This excess cash can be paid out as dividends to shareholders without impacting the cash flows. Remember that excess cash is cash and cash equivalents more than required in the operations of the business.
