Valuation 2 Chapter 10

Enterprise DCF Valuation

Values a firm by discounting free cash flow available to all investors at the weighted average cost of capital.

Enterprise Value

The value of a firm’s operations attributable to all capital providers.

Equity Value

The residual value available to shareholders after subtracting debt and other nonequity claims from enterprise value.

Free Cash Flow (FCF)

Cash flow available to debt holders and equity holders after operating expenses and investments.

NOPAT

Net operating profit after taxes assuming the firm is all-equity financed.

Value of Operations

The present value of all future free cash flows generated by the firm’s operations.

Explicit Forecast Period

The period over which free cash flow is forecasted individually.

Continuing Value

The value of cash flows beyond the explicit forecast period.

Key Value Driver Formula

A valuation formula that expresses firm value as a function of NOPAT, growth, ROIC, and WACC.

ROIC

Return on invested capital, measuring operating performance relative to invested capital.

Weighted Average Cost of Capital (WACC)

The blended required return of debt and equity investors used to discount free cash flow.

Consistency Principle

Cash flows and discount rates must reflect the same risk and financing assumptions.

Operating Working Capital

Current operating assets minus current operating liabilities used in daily operations.

Net Investment

Investment in operating assets required to support growth.

Nonoperating Assets

Assets not required to generate operating income, such as excess cash.

Nonequity Claims

Financial claims other than common equity that must be subtracted from enterprise value.

Debt

Interest-bearing obligations that represent a claim on enterprise value.

Noncontrolling Interest

The value of outside shareholders’ ownership in a consolidated subsidiary.

Goodwill

The excess of purchase price over the fair market value of net identifiable assets.

Value Creation Rule

Growth creates value only when ROIC exceeds the cost of capital.

Enterprise Value to EBITA Multiple

A valuation multiple that compares enterprise value to operating earnings before interest and taxes adjusted.

Adjusting for Nonoperating Items

Removing nonoperating assets from enterprise value to ensure consistency with EBITA.

Comparable Multiples Analysis

Valuing a firm by comparing valuation multiples across similar companies.

Peer Group Selection

Choosing comparable firms with similar operations rather than using broad industry averages.