Enterprise Discounted Cash Flow Model  179
EXHIBIT 10.2  Enterprise Valuation of a Single-Business Company
$ million
110
20
70
15
65
110
427.5
90
70
85
55
70
140
100
120
180
427.5
Discount free cash flow by 
the weighted average 
cost of capital. 
Enterprise value
After-tax cash flow to debt holders
Cash flow to equity holders
Debt value1
200.0
Equity value
227.5
Free cash flow
1 Debt value equals discounted after-tax cash flow to debt holders plus the present value of interest tax shield.
value either directly at $227.5 million or by estimating enterprise value ($427.5 
million) and subtracting the value of debt ($200.0 million).
The enterprise DCF method is especially useful when applied to a mul-
tibusiness company. As Exhibit 10.3 shows, the enterprise value equals the 
summed value of the individual operating units less the present value of the 
corporate-center costs, plus the value of nonoperating assets.3 You can use the 
enterprise DCF model to value individual projects, business units, and even 
the entire company with a consistent methodology.
EXHIBIT 10.3  Valuation of a Multibusiness Company
$ million
200 
125 
225 
30 
520 
40 
560 
200 
360 
Unit A
Unit B
Value of operating units
Unit C
Corporate 
center
Value of 
operations
Nonoperating 
assets1
Enterprise 
value
Value of 
debt
Equity
value 
1 Including excess cash and marketable securities.
3 Many investment professionals define enterprise value as interest-bearing debt plus the market value 
of equity minus cash, whereas we define enterprise value as the value of operations plus nonoperating 
assets. The investment banker’s definition of enterprise value resembles our definition of the value of op-
erations, but only for companies that do not own nonoperating assets (e.g., nonconsolidated subsidiaries) 
or owe debt equivalents (e.g., unfunded pension liabilities). For companies with significant nonoperating 
assets or debt equivalents, the banking version of enterprise value can lead to distortions in analysis.

180  Frameworks for Valuation
Valuing a company’s equity using enterprise DCF is a four-step process:
1. Value the company’s operations by discounting free cash flow at the 
weighted average cost of capital.
2. Identify and value nonoperating assets, such as excess cash and market-
able securities, nonconsolidated subsidiaries, and other nonoperating 
assets not incorporated into free cash flow. Summing the value of opera-
tions and nonoperating assets gives enterprise value.4
3. Identify and value all debt and other nonequity claims against the en-
terprise value. Debt and other nonequity claims include fixed-rate and 
floating-rate debt, debt equivalents such as unfunded pension liabilities 
and restructuring provisions, employee options, and preferred stock, 
which are discussed in Chapter 16.
4. Subtract the value of debt and other nonequity claims from enterprise 
value to determine the value of common equity. To estimate value per 
share, divide equity value by the number of current shares outstanding.
Exhibit 10.4 presents the results of an enterprise DCF valuation for 
GlobalCo, an imaginary international logistics company. GlobalCo is used 
throughout the chapter to compare valuation methods. GlobalCo is a simpli-
fied example that ignores the complexities of modern companies. In Appendix 
H, we present a complete valuation of the global retailer Costco Wholesale. 
4 Many investment professionals do not include excess cash when estimating enterprise value and instead 
net excess cash directly against debt.
EXHIBIT 10.4  GlobalCo: Enterprise DCF Valuation
$ million, except where noted
Forecast year
Free cash 
flow (FCF)
Discount 
factor 
at 7.8%
Present 
value of FCF
Year 1
(2.0)
0.928 
(1.9)
Year 2
22.5
0.861
19.4
Year 3
54.6
0.798
43.6
Continuing value
1,176.2
0.798
938.9
Value of operations
1,000.0
Value of nonoperating assets
–
Enterprise value
1,000.0
Less: Value of debt
(250.0)
Less: Debt equivalents and noncontrolling interests
–
Equity value
750.0
Shares outstanding, million
12.5
Equity value per share, $
60.00