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The document discusses different approaches to calculating enterprise value (EV), including the accounting approach, efficient markets approach, and discounted cash flow (DCF) method. It highlights the importance of separating operational and financial items on the balance sheet and revaluing them at market values where possible. Additionally, it outlines two implementations of the DCF approach based on the firm's cash flow statements and pro forma financial models.

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Wycliff Ndua
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13 views2 pages

Blance

The document discusses different approaches to calculating enterprise value (EV), including the accounting approach, efficient markets approach, and discounted cash flow (DCF) method. It highlights the importance of separating operational and financial items on the balance sheet and revaluing them at market values where possible. Additionally, it outlines two implementations of the DCF approach based on the firm's cash flow statements and pro forma financial models.

Uploaded by

Wycliff Ndua
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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The accounting approach to EV moves items on the balance sheet so that

all operating items are on the left-hand side of the balance sheet and all i nancial

items are on the right-hand side. Although most academics sneer at this

approach, it is often a useful starting point for thinking about the enterprise

value.

• The efi cient markets approach to EV revalues—to the extent possible—

items on the accounting EV balance sheet at market values. An obvious revaluation

is to replace the i rm ’ s book value of equity with the market value of the

equity. To the extent that we know the market value of other i rm liabilities—

debt, pension obligations, etc.—this market value will also replace the book

values.

• The discounted cash l ow (DCF) approach values the EV as the present value

of the i rm ’ s future anticipated free cash l ows (FCFs) discounted at the

weighted average cost of capital (WACC). The FCFs can best be thought of

as the cash l ows produced by the i rm ’ s productive assets—its working capital,

i xed assets, goodwill, etc.

• In this book we use two implementations of the DCF approach. These

approaches differ in their derivation of the i rm ’ s free cash l ows.

􁂼 In Chapter 4 we base our projections of future anticipated FCFs on an

analysis of the i rm ’ s consolidated statement of cash l ows.

􁂼 In Chapters 5 and 6 we base our projections of future anticipated FCFs

on a pro forma model for the i rm ’ s i nancial statements.

2.3 Using Accounting Book Values to Value a Company: The Firm ’ s Accounting
Enterprise Value

While we would rarely use accounting numbers to value a company, the

balance sheet of a company is a useful starting framework for the valuation

process. In this section we show how accounting statements can help us dei ne

the concept of enterprise value (EV). As a starting point, consider the balance

sheet for XYZ Corp.:

55 Corporate Valuation Overview

We rewrite this balance sheet:

• We separate the operational versus i nancial items in short-term assets and

short-term liabilities.

• We move the operational current assets to the left side of the balance sheet.

• We move all the debt (short-term debt, current portion of long-term debt,

and long-term) into one debt item.

55

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