What does the PV of cash flows equal when discounted by the WACC in a DCF?

What does the PV of cash flows equal when discounted by the WACC in a DCF?

• A. Equity Value
• B. Enterprise Value
• C. Net Present Value
• D. Market Capitalization

Answer: (B)

In a DCF, the present value of unlevered cash flows (cash flows available to all providers of capital) discounted at the weighted average cost of capital represents the value of the firm’s operations—the enterprise value. WACC is the blended required return for both debt and equity after tax, so discounting FCFF at this rate captures the cost of financing the entire business. This PV reflects the value of the company’s assets regardless of how it’s financed. To get equity value, you would subtract net debt from enterprise value; market capitalization is the equity value for a public company. Net present value is a separate concept used for evaluating specific projects.

In a DCF, the present value of unlevered cash flows (cash flows available to all providers of capital) discounted at the weighted average cost of capital represents the value of the firm’s operations—the enterprise value. WACC is the blended required return for both debt and equity after tax, so discounting FCFF at this rate captures the cost of financing the entire business. This PV reflects the value of the company’s assets regardless of how it’s financed. To get equity value, you would subtract net debt from enterprise value; market capitalization is the equity value for a public company. Net present value is a separate concept used for evaluating specific projects.