I was wondering if it is true to says that the PV of FCFFs = TEV?

Does TEV take into account all the features of FCFFs?

FCFFs take into account change in CAPEX, is that really factored in TEV=net operating assets?


I don’t know.

TEV doesn’t discount I think.

But TEV is a fair market value at a certain point in time, just like the PV of FCFFs

I’m pretty sure that TEV is equal to the replacement value of assets, plus the PV of FCFF discounted at WACC. If you have a company that generates 0 FCFF off to eternity, the company is not worth zero, because the company’s assets are still worth something. If you are going to liquidate the firm, those assets will need a liquidation discount; if the company is a going concern, then you need to consider the replacement value of assets (presumably minus accumulated depreciation - to the extent that replacement minus depreciation is an accurate assessment of remaining useful life).

assets are valued at lower of value in use or FMV - cost to sell per IFRS. liquidation value is not relevant here I think as it does not assume going concern. In that particular case of course what you said is right. But in most cases when running a valuation there is going concern hence assets would not be valued at liquidation value.

My reply was generalized, and the main point is that TEV is not simply the PV(FCFF) as the OP asked, because that ignores the value of assets already in place. Even if PV(FCFF)=0, the company is still worth (at the least) the liquidation value of its assets. This approach is about trying to figure out what a company is worth (TEV), rather just saying what is required for an accounting statement to be acceptable under IFRS.

If you have 0 FCFF, there’s a decent chance that going to liquidate the company, so that’s why I brought it up. If PV(FCFF) is positive, then you’re probably not going to liquidate, unless the competitive situation changes materially, or you decide that your WACC doesn’t reflect new risks adequately and the additional value doesn’t justify the risk.

So in the going concern case, you won’t apply a liquidation discount. Instead, you’d figure out how much it would cost to create an identical copy of the company (i.e. replacement value of the assets - both tangible and any intangibles that are genuinely relevant). Of course, existing assets may be run-down a bit and require replacement faster than new ones would, so you’d have to discount that in some way, and the accumulated depreciation should be a reasonable estimate (though you might want to apply it as a percentage discount applied to new values). You’ll have to replace that degraded capital eventually, but the expected CapEx expenditures are already included in your FCFF stream, so you’re set there.

Under going concern, value of assets in place should reflects future benefit form those, hence future cash flows (FCFFs), as per IFRS. I don’t think discussing liquidation value accounting is relevant for the question of this thread (strawman issue).

Ok. Go ahead and calculate TEV as PV(FCFF). Sorry to offer straw-men replies to your question.

and is the market value of a bond equal to the PV of its scheduled interest and amortization payments discounted at a market rate, plus the recovery amount in case of default?

Hmm, good point: But a bond matures. Stock doesn’t. It would seem to make a difference.

Anyway, how do you get around the fact that a company that produces FCFF of $0 per year, but owns 10 tons of gold is still not worth $0. Especially since a PV(FCFF)=0 doesn’t trigger any default clause. I’m thinking about the Residual Income and EVA types of models, which value things in terms of book value plus the accumulated spread of profits over the cost of capital, but admittedly it’s been a while since I’ve looked at those.

refer to the definition of an asset. Basic accounting.

You can argue that a company can use debt to fund assets that will increase in value, but this is taken into acocunt in ‘equity’ hence in the TEV.

TEV is NOT equalt to liquidation value.

PV of FCFF is extremely NOT equal to the increment to reach FMV.

in my opinion bothe TEV and FCFF should give the market value of assets. here is why:

PV of FCFF : refer to the definition of ans asset per IFRS.

TEV : it uses market value of debt and equity hence factors in the change in FMV of assets.

@bchad, FCFF discounted at WACC should result in the value of net operating assets, to the extent that the projected cash flows are generated by utilizing the asset base in question. In your example, the gold is not used to produce cash flows - I’d add this to the PV of FCFF as a “non-operating” or “excess asset”. The key is to analyze which assets are necessary (and sufficient) in order to generate the projected cash flow stream - then you’ve captured their value in going concern through your DCF. Of course, depending on how you define TEV, there might be on- or off-balance sheet non-operating assets or liabilities in addition to the operating asset value already captured.

If we leave excess/non-operating assets aside, sometimes the value of an operating asset is higher in a liquidation scenario because the company is not putting it in its best use and is generating zero or negative FCFF. They’ll be better off discontinuing their money-losing operations and selling their assets off - this establishes a floor but I’d view it as an “option” rather than something to add on top, i.e. TEV = Max(Liquidation Value, PV of FCFF) + Non-operating assets, net.

Yes, after thinking about it a bit, I realized that what confused me here is that liquidation (either full or of excess assets) is effectively a real option available to company owners/management, so :

TEV = MAX( (liquidation value of assets) ; (PV(FCFF) discounted at WACC) )

Then the question becomes whether management is managing operations such that there is a positive NPV between the cost to assemble equivalent assets and the PV of FCFF out to eternity. If the PV < liquidation value of assets, then the NPV of owning the company is negative, and management either needs to reorganize its processes or liquidate the company.

That’s more like the Greenwald franchise approach, where there’s a valuation by assets and a valuation by earnings power. The optionality had me thinking more along the likes of EVA models, but I remembered them incorrectly (which is why I said “I’m pretty sure” rather than just asserting the answer).

Great, thats what I wanted to confirm. Though it would not be common to see a company holding an asset and not using it to its best use. Formulas still makes sense.

I think it is also true that the value of some operating assets is not fully reflected through FCFF model and may make sense to value these assets separately. A good example is when a company owns a lot of valuable real estate. For these types of companies you may want to value the real estate separately such as a non operating asset and add to the PV of FCFF adjusted to reflect rent to fully capture the value of company. You see this quite often where activists shareholders want to conduct sale leaseback transactions or a REIT entity as the real estate is not fully reflected in stock price.