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.