Enterprise Value
The primary role of directors, officers and managers is to create Enterprise Value.
Enterprise Value represents the present value of all of the cash flow that a company has or will have. It uses the investor’s desired benchmark yield as the discount rate. A reasonable benchmark is the return on the S&P 500 stock index, which has earned (inflation plus 8 percent p.a. compounded) over the past 70 years.
| Enterprise Value |
= |
Current Cash |
+ |
Present Value of all Future Free Cash Flow (Includes Growth) |
- |
Current Debt |
The equation says that the Enterprise Value of a company equals:
- the cash held in bank accounts or liquid investments; PLUS
- the current (present) value of all the cash that it will generate in the future and that can be returned to Shareowners without impairing growth; MINUS
- The cash required to pay off all of its borrowed debt.