Self teaching myself DCF analysis and trying to wrap my head around the concept of:
Why does DCF = Enterprise Value?
I have a hazy feeling it has something to do with net present value (maybe), but I'm not entirely sure.
Any clarification is greatly appreciated to this dumb monkey.
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Think of it this way -- the value of the company is the sum of all discounted FCF it can produce in the future. If I want to buy a business, I don't really care how fancy the company's widgets are, or whether the CEO is a smart guy. What I ultimately care about is: how much money can I get out of this? Thus, the value of a business is in how much money that business makes me. Does that make sense?
You should be using unlevered FCF, meaning you should be discounting unlevered FCF. Unlevered FCF means CF irregardless of capital structure. Because we are using this, we are using a CF for which all stakeholders (e.g. debt, equity) have a claim. EV represents this, as opposed to equity value, which only represents equity holders.
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