DCF DCF Equity Value and Enterprise Value

Question 1

What is the difference between enterprise value (EV) and equity value in a DCF analysis?

Accepted Answer

EV represents the value of the entire business; equity value is what remains for shareholders after deducting net debt

Answer

EV equals market capitalization; equity value includes debt

Answer

EV is only used for private companies; equity value is for public companies

Answer

They are interchangeable terms in DCF analysis

Question 2

In a DCF model using unlevered free cash flows (UFCF), what do you arrive at after discounting at WACC?

Accepted Answer

Enterprise value

Answer

Equity value

Answer

Book value of equity

Answer

Market capitalization

Question 3

To convert enterprise value to equity value in a DCF, which of the following adjustments is made?

Accepted Answer

Subtract net debt (total debt minus cash)

Answer

Add total debt and subtract cash

Answer

Subtract total liabilities

Answer

Add minority interest and subtract preferred stock

Question 4

Which DCF approach directly produces equity value without first calculating enterprise value?

Accepted Answer

Levered free cash flow (LFCF) discounted at the cost of equity

Answer

UFCF discounted at WACC

Answer

EBITDA discounted at WACC

Answer

Operating income discounted at the cost of debt

Question 5

A company has an enterprise value of $500M, total debt of $120M, and cash of $20M. What is its equity value?

Accepted Answer

$400M

Answer

$380M

Answer

$620M

Answer

$500M

Question 6

Why is it important to use net debt (not gross debt) when bridging from enterprise value to equity value?

Accepted Answer

Cash can immediately be used to repay debt, so it offsets the debt obligation

Answer

Gross debt includes off-balance-sheet items that aren't relevant

Answer

Net debt accounts for the tax shield on interest

Answer

Cash must be excluded because it is not part of operations