I was confused when I was looking over the definition of “value of the firm”, because the notes define value of the firm by using FCFF (free cash flow to the firm), which was different from the definition of enterprise value. It seems like they are all capturing the total value of a firm. Are they the same thing?
Hi,
not sure how CFAI defines this but in general:
Firm value is the value of all the assets a company has vs. enterprise value is the value of only the operating assets a company owns. Note that this is equivalent of the present value of the respective cash-flows arising from these assets.
Firma value (FV) = market value of balance sheet = market value of operating assets + market value of non-operating assets (i.e. non-operating cash) = market value of total equity + market value of total debt = present value of operating cash-flows + present value of non-operating cash-flows
Enterprise value (EV) = market value of operating balance sheet + market value of operating assets = present value of operating cash-flows.
This translates into FV = EqV + Debt <=> EV = FV - non-operating assets/cash
Regards, Oscar
Thanks for your response.
Here’s what I found on Schweser Notes:
Firm value= (FCFF in year 1)/(WACC-g). I quite understand what you are saying: firm value measures the total market value of balance sheet items. But why do we get a value of the balance sheet items by using free cash flow to the firm? Free cash flow to the firm represents the future possible cash flow, and it is not related to balance sheet items.
And same on Schweser Notes:
Enterprise value= market value of common stock+ market value of preferred equity+ mkt value of debt+ minority interest- cash and investment.
Are these items all operating assets?
Best,
Brockman