How Enterprise Value Differs from Equity Value

A business is valued at THB 14 million. Is that the shareholders' money?

A valuation can be arithmetically tidy and still answer the wrong question. “The business is worth THB 14 million” leaves open whether the number covers operating assets, includes excess cash, or has already deducted debt. A shareholder cannot use these descriptions interchangeably when negotiating a price.

This chapter uses a separate steady-growth company scenario to connect operating enterprise value with equity value. It is not an extension of the three-year project. That project ends in year 3, returns its assumed working capital, and has no terminal sale proceeds. We cannot attach a perpetual business to it without a new economic case.

I would label the cash-flow claimant before opening a valuation spreadsheet. That small step prevents mixing a cash flow available to all capital providers with an equity-only discount rate.

State the new scenario before calculating

Assume this separate company will generate THB 1,000,000 of FCFF in year 1 and then grow at 2% a year indefinitely. FCFF is after operating taxes and the reinvestment needed for that growth, but before financing cash flows. All amounts are nominal annual Thai baht. This is a teaching forecast, not a market estimate.

Use the shared hypothetical WACC of 9.12%, equity cost of 12%, pretax debt cost of 6%, and an assumed usable 20% tax effect. Maintain debt at 40% of operating enterprise value and equity at 60%. There are no other claims in this simplified case. Separate excess cash is THB 200,000.

These assumptions work together. Steady growth requires continuing reinvestment; it is already included in the stated FCFF. A maintained market-value debt ratio also requires borrowing to change as the operating business grows. Neither assumption means the company can grow without committing resources.

First value the operating cash flow

Damodaran's introduction to valuation distinguishes cash flows to the firm from cash flows to equity and matches them with the appropriate required return. Under our constant-growth assumptions, operating value is FCFF in year 1 divided by WACC minus growth.

Operating EV = 1,000,000 ÷ (9.12% − 2%) = THB 14,044,943.82. Growth must remain below the discount rate for this formula, and the company must actually fit the stable scenario. The denominator is an economic assumption, not a formatting choice.

Here the 40% debt weight applies to operating value, excluding the separately added cash. It is a market-value target, not the initial THB 400,000 loan used in chapter 9 and not a ratio of accounting balances. Other definitions of a capital target require their own consistent model.

Check the equity route with the same financing policy

Can we reach operating equity value directly? Begin with year 1 FCFF, deduct after-tax interest, and include net borrowing. At the beginning market debt of THB 5,617,977.53, the assumed after-tax interest is approximately THB 269,662.92: debt multiplied by 6% and then by 80%.

To maintain the same market-value debt proportion as the operating business grows at 2%, debt also grows by 2% in this steady case. Net new borrowing is approximately THB 112,359.55. It is not an arbitrary cash plug, and omitting it would change the financing policy being valued.

FCFE in year 1 = 1,000,000 − 269,662.92 + 112,359.55 = THB 842,696.63. Discount that growing equity cash flow at the equity cost. Using unrounded FCFE divided by (12% − 2%) gives operating equity of THB 8,426,966.29 before adding the separate excess cash.

The agreement is a consistency check under these assumptions, not a promise that any FCFF and FCFE spreadsheets will agree. A fixed amortizing loan, changing risk, unavailable tax deductions, different reinvestment, or an inconsistent debt definition can break the comparison. Do not borrow the output while dropping the conditions that produce it.

Count cash, reinvestment and IP in the right place

We added THB 200,000 only because the operating forecast excludes this separate excess cash. Cash needed for normal operations is not automatically excess. If its earnings or value are already included elsewhere, adding it again would duplicate value.

The same discipline applies to software and intellectual property. If licensing benefits or subscription earnings from an asset are already in forecast operating cash flow, the asset does not automatically become an extra amount to stack on top of the DCF. A separate claim requires identifying genuinely additional benefits or a different valuation boundary.

Likewise, the year 1 FCFF already incorporates the reinvestment needed for 2% growth. Subtracting that reinvestment again understates cash; forecasting growth without allowing for its resource needs can overstate it. The workbook should show the bridge from operations to FCFF, even when this chapter begins with FCFF as a given input.

Exercise: three numbers in a purchase discussion

A seller points to operating EV of THB 14,044,943.82 and says shareholders should receive that amount plus THB 200,000 cash, while the buyer also assumes all modeled debt. What is missing from the proposed equity price?

Answer: the THB 5,617,977.53 debt claim. Under this simplified scenario, total equity is THB 8,626,966.29, not operating EV plus cash without the debt deduction. Real transactions also require checking debt-like items, working-capital terms, restrictions, other claims, and the exact assets transferred. Those details are outside this numerical case.

For the next investment memo, write both the number and its boundary. “Operating value before debt and excess cash” gives a reviewer a usable starting point. “Company value” by itself does not.

Read further

Damodaran's FCFE notes explain the stable-growth equity approach. The site's earlier DCF article develops assumptions, while the software and AI integration valuation article examines double counting. The worked figures in this chapter are our hypothetical case.