In a DCF, what two components determine Enterprise Value?

In a DCF, what two components determine Enterprise Value?

• A. Net Income and EBITDA
• B. Free Cash Flow and Net Debt
• C. Revenue and Operating Income
• D. PV of Cash Flows and PV of Terminal Value

Answer: (D)

The value from a discounted cash flow comes from two pieces: the cash flows you forecast during the explicit period and the value of all the cash flows beyond that period. In practice, you take the present value of the forecasted free cash flows to the firm (or to equity, depending on the approach) and add the present value of the terminal value, which represents the ongoing cash flows after the forecast horizon. Their sum equals Enterprise Value. This approach matters because cash flow, not accounting profits, reflects real money that can be returned to investors, and the terminal value captures the long-term potential beyond the forecast window. The other options mix accounting metrics or top-line figures that don’t directly represent the cash-generating ability or timing of a business, so they don’t determine Enterprise Value in a DCF.

The value from a discounted cash flow comes from two pieces: the cash flows you forecast during the explicit period and the value of all the cash flows beyond that period. In practice, you take the present value of the forecasted free cash flows to the firm (or to equity, depending on the approach) and add the present value of the terminal value, which represents the ongoing cash flows after the forecast horizon. Their sum equals Enterprise Value.

This approach matters because cash flow, not accounting profits, reflects real money that can be returned to investors, and the terminal value captures the long-term potential beyond the forecast window. The other options mix accounting metrics or top-line figures that don’t directly represent the cash-generating ability or timing of a business, so they don’t determine Enterprise Value in a DCF.