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Enterprise value (EV), total enterprise value (TEV), or firm value (FV) is an economic measure reflecting the market value of a business (i.e. as distinct from market price). It is a sum of claims by all claimants: creditors (secured and unsecured) and shareholders (preferred and common).
The Present Value of the Terminal Value is then added to the PV of the free cash flows in the projection period to arrive at an implied Enterprise Value. Note that if publicly traded comparable company multiples must be used, the resulting implied enterprise value will not reflect a control premium. Depending on the purposes of the valuation ...
According to one version of the discounted cash flow valuation model, the intrinsic value of a company is the present value of all future expected free cash flows. In this case, the present value is computed by discounting the free cash flows at the company's weighted average cost of capital (WACC).
The other (Firm L) is levered: it is financed partly by equity, and partly by debt. The Modigliani–Miller theorem states that the enterprise value of the two firms is the same. Enterprise value encompasses claims by both creditors and shareholders, and is not to be confused with the value of the equity of the firm.
Where the forecast is of free cash flow to firm, as above, the value of equity is calculated by subtracting any outstanding debts from the total of all discounted cash flows; where free cash flow to equity (or dividends) has been modeled, this latter step is not required – and the discount rate would have been the cost of equity, as opposed ...
Discounting free cash flows to firm (FCFF) at the weighted average cost of capital (WACC) yields the enterprise value. The firm's net debt and the value of other claims are then subtracted from EV to calculate the equity value. If only the free cash flows to equity (FCFE) are discounted, then the relevant discount rate should be the required ...
Absolute value models ("Intrinsic valuation") that determine the present value of an asset's expected future cash flows. These models take two general forms: multi-period models such as discounted cash flow models, or single-period models such as the Gordon model (which, in fact, often "telescope" the former). These models rely on mathematics ...
Adjusted net book value may be the most relevant standard of value where liquidation is imminent or ongoing; where a company earnings or cash flow are nominal, negative or worth less than its assets; or where net book value is standard in the industry in which the company operates. The adjusted net book value may also be used as a "sanity check ...