Final answer:
Cash is subtracted when calculating enterprise value because it is considered a non-operating asset and not directly related to the company's core operations, while debt is included as a liability that needs to be paid off. By subtracting cash and including debt, enterprise value provides a more accurate measure of a company's total value.
Step-by-step explanation:
When calculating enterprise value, cash is subtracted because it represents excess cash on a company's balance sheet that is not directly related to its core operations. Cash is considered a non-operating asset and is not included in the calculation of enterprise value because it is not a source of financing or an indicator of the company's underlying value.
On the other hand, debt is included in the calculation of enterprise value because it represents a liability that needs to be paid off. Debt is considered a financing source and is taken into account to assess the total value of the company.
By subtracting cash and including debt, enterprise value provides a more accurate measure of a company's total value, considering both its operating and financing aspects.