It seems valuation as I have learned it focuses on valuing a company's operating potential, but surely $10bn of non-operating assets (property say) are not irrelevant and add value in their ability to generate cash when sold?
| +350 | Evercore Intern Seizure | 54 | 1h |
| +66 | JPM M&A is Gone??? Purely Coverage Banking??? | 31 | 1h |
| +58 | Is DCM actually underrated ? | 24 | 12h |
| +48 | Losing my personality in Banking | 9 | 12h |
| +48 | How do I understand vs. just memorizing? | 5 | 10h |
| +47 | Are all Tech / TMT groups sweaty? | 38 | 13h |
| +42 | Associate & Above IB exits | 16 | 3d |
| +32 | Incoming IB Analyst: Best Ways to Prepare? | 10 | 9h |
| +27 | Which groups are ideal for laterals? | 12 | 11h |
| +24 | The good and bad with Wells Fargo | 1 | 17h |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
You're not wrong. You value a firm based on both. In a DCF, for example, you'd take the future cash flows of the business -- which are generated by the operating assets -- and add that discounted value to any non-operating assets (eg excess cash). Real estate is a bit trickier -- for example, a retailer can lease instead of own its property. In the case where you would want to explore the value of the business by treating the real estate as a non-operating asset (ie a REIT separation and spin), you'd have to discount the operating cash flows accordingly by what the lease payments would be.
But I think that's pretty clear by the typical formula of DCF + Cash - Debt...so either your teachers suck or you're not reading their material correctly. Either way, your intuition is right.
Thanks - great answer.
I don't study finance (basically no-one in the UK does) so I have been self-learning and so far I had led myself to believe 'EV = DCF'. 'EV = DCF + Cash - Debt' makes more sense.
Sorry, I've been drinking. I need to clarify that is for equity value.
equity value = Cash + Non-operating Assets + Operating Assets - Debt
Enterprise Value = Operating Assets = equity value - Cash - Non-Operating Assets + Debt
The former is intuitive, the latter a little less so. But think of Enterprise Value as the effective price of buying an entire business. You can use the cash and sell off the non-operating assets to fund your purchase, and you'd still have the same business with the same cash generating potential.
Thanks for clarifying. My question was basically, why does EV = Operating Assets? Is a business A worth the same as an identical business B, but where B has $10bn in cash? Surely you would have to pay $10bn extra for B? The same goes for non-operating assets?
Voluptate praesentium minima quisquam placeat quo ea. Voluptates eum porro sunt in. Eveniet vero nostrum enim magnam ab a et.
Ex distinctio unde sed expedita. Necessitatibus dolores est cupiditate doloribus. Ipsa ut minus repudiandae. Fugiat nemo eum et aut corporis debitis corporis. Sint aut voluptas voluptatem soluta nisi.
Sunt molestiae quis dolores laudantium quia et. Veniam et veniam sed nihil quia in enim. Eveniet odio cumque sit error illo praesentium. Aut cum magni odit ut eos deleniti voluptas eum. Quasi odit natus architecto veritatis sunt rerum repellat. Ullam illo laudantium molestiae et aliquam et quam qui.
Dolorum laborum magni consequatur sint ipsum aut error. Quia aut voluptatibus animi voluptatum explicabo perspiciatis. Pariatur deleniti dolorem ducimus deleniti quo minima aliquid.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...