Enterprise Value (EV) Calculator Using WACC
Calculate Enterprise Value (EV)
This calculator helps you estimate the Enterprise Value (EV) of a company using its Free Cash Flow to Firm (FCFF), Weighted Average Cost of Capital (WACC), and expected growth rate, based on a perpetuity growth model.
What is Enterprise Value (EV) and How Do We Calculate EV Using WACC?
Enterprise Value (EV) represents the total value of a company, including all claims from both debt and equity holders, net of cash. It’s often considered a more comprehensive valuation measure than market capitalization, especially when comparing companies with different capital structures. We can calculate EV using WACC as a key component within a Discounted Cash Flow (DCF) model, specifically by discounting Free Cash Flow to Firm (FCFF) at the WACC.
FCFF represents the cash flow available to all investors (debt and equity holders) after the company has paid all operating expenses and investments. WACC is the average rate of return a company is expected to pay to all its security holders to finance its assets. When we discount projected FCFFs and a terminal value at the WACC, we get the Value of the Firm (or Value of Operations). To calculate EV using WACC and FCFF in a simplified perpetuity model, we first find the Value of the Firm and then adjust for cash.
Who Should Use This Calculation?
Investors, financial analysts, and corporate finance professionals use EV for:
- Valuing companies for mergers and acquisitions.
- Comparing companies with different debt levels.
- Assessing the overall value of a business beyond just its equity.
Common Misconceptions
A common misconception is that EV is the same as market capitalization. Market cap only reflects the value of the company’s equity, while EV includes debt and subtracts cash, giving a more complete picture of the company’s total worth and the value attributable to its core operations.
Enterprise Value (EV) Formula and Mathematical Explanation When Using WACC
The core idea when you calculate EV using WACC is that WACC is the appropriate discount rate for Free Cash Flow to Firm (FCFF). The present value of all future FCFFs discounted at WACC gives the Value of the Firm (Vfirm).
For a company with stable growth, we can use the Gordon Growth Model (perpetuity growth model) to find the Value of the Firm based on the next year’s FCFF (FCFF1):
1. FCFF1 = FCFF0 * (1 + g)
2. Value of Firm (Vfirm) = FCFF1 / (WACC – g)
Where:
- FCFF1 is the Free Cash Flow to Firm expected in the next period.
- FCFF0 is the Free Cash Flow to Firm in the current/last period.
- WACC is the Weighted Average Cost of Capital.
- g is the constant growth rate of FCFF in perpetuity.
This Vfirm represents the total value of the company’s operating assets, attributable to both debt and equity holders.
3. Enterprise Value (EV) = Value of Firm (Vfirm) – Cash and Cash Equivalents
This is because Vfirm (derived from discounting FCFF at WACC) is the value of operations, and EV is the value of operations less non-operating assets like excess cash (as it’s already accounted for in Vfirm if it’s considered operational, but typically deducted to get to the value of core operations net of cash holdings).
Variables Table
| Variable | Meaning | Unit | Typical Range |
|---|---|---|---|
| FCFF0 | Free Cash Flow to Firm (last period) | Currency (e.g., USD) | Varies greatly |
| g | Long-term growth rate of FCFF | % | 0% – 5% (usually below long-term GDP growth) |
| WACC | Weighted Average Cost of Capital | % | 5% – 15% (must be > g) |
| Cash | Cash and Cash Equivalents | Currency (e.g., USD) | Varies |
| Vfirm | Value of the Firm (Operating Assets) | Currency (e.g., USD) | Calculated |
| EV | Enterprise Value | Currency (e.g., USD) | Calculated |
Table explaining variables used to calculate EV using WACC.
Practical Examples (Real-World Use Cases)
Example 1: Stable Manufacturing Company
A manufacturing company had an FCFF of $5,000,000 last year. It expects to grow its FCFF at a stable 2% per year indefinitely. Its WACC is 7%, and it has $1,000,000 in cash.
- FCFF0 = $5,000,000
- g = 2%
- WACC = 7%
- Cash = $1,000,000
FCFF1 = $5,000,000 * (1 + 0.02) = $5,100,000
Vfirm = $5,100,000 / (0.07 – 0.02) = $5,100,000 / 0.05 = $102,000,000
EV = $102,000,000 – $1,000,000 = $101,000,000
The Enterprise Value is $101 million. This method helps to calculate EV using WACC efficiently for stable firms.
Example 2: Tech Company with Moderate Growth
A tech company has FCFF0 = $20,000,000, g = 4%, WACC = 10%, and Cash = $5,000,000.
- FCFF0 = $20,000,000
- g = 4%
- WACC = 10%
- Cash = $5,000,000
FCFF1 = $20,000,000 * (1 + 0.04) = $20,800,000
Vfirm = $20,800,000 / (0.10 – 0.04) = $20,800,000 / 0.06 = $346,666,667
EV = $346,666,667 – $5,000,000 = $341,666,667
The Enterprise Value is approximately $341.7 million. Understanding how to calculate EV using WACC is crucial for valuing such companies.
How to Use This Enterprise Value (EV) Calculator
This calculator simplifies the process to calculate EV using WACC and FCFF with a perpetuity growth assumption.
- Enter FCFF (Last Period): Input the company’s Free Cash Flow to Firm from the most recent full year.
- Enter Long-term Growth Rate (g): Input the sustainable, constant growth rate you expect for the company’s FCFF in the long run (as a percentage).
- Enter WACC: Input the company’s Weighted Average Cost of Capital (as a percentage). Ensure WACC is greater than the growth rate.
- Enter Cash & Cash Equivalents: Input the company’s cash and cash equivalents from its balance sheet.
- Click “Calculate EV”: The calculator will display the projected FCFF1, Value of Firm, WACC-g spread, and the final Enterprise Value (EV).
- Review Results: The primary result is the EV. Intermediate values help understand the components. The chart visualizes the key figures.
The results help in understanding the intrinsic value of the company’s operations before considering its cash holdings.
Key Factors That Affect Enterprise Value (EV) Results When Calculated Using WACC
Several factors influence the EV calculation:
- Free Cash Flow to Firm (FCFF): Higher current and projected FCFF directly increase the Value of the Firm and thus EV.
- WACC: A higher WACC (discount rate) reduces the present value of future cash flows, lowering the Value of the Firm and EV. It reflects higher risk or cost of capital.
- Growth Rate (g): A higher sustainable growth rate increases the Value of the Firm and EV, but it must be realistic and less than WACC.
- WACC-g Spread: The difference between WACC and g is crucial. A smaller spread (but still positive) leads to a much higher valuation multiple on FCFF1.
- Cash & Cash Equivalents: Higher cash balances reduce the EV when calculated as Vfirm – Cash.
- Accuracy of Inputs: The reliability of the EV calculation heavily depends on the accuracy and reasonableness of the FCFF, WACC, and g estimates. Small changes in g or WACC can significantly impact EV.
- Terminal Value Assumptions: Although this calculator uses a simple perpetuity model, in a multi-stage DCF, the terminal value calculation and its assumptions are major drivers of EV. For more details, see our Terminal Value Calculator.
Frequently Asked Questions (FAQ)
What is the difference between Enterprise Value and Equity Value?
Equity Value (or Market Capitalization) is the value attributable only to shareholders. Enterprise Value is the value of the entire company attributable to all capital providers (equity and debt), net of cash. EV = Equity Value + Debt + Minority Interest + Preferred Stock – Cash.
Why is WACC used to discount FCFF?
FCFF represents cash flows available to all capital providers (debt and equity). WACC represents the blended cost of capital from all these sources, making it the appropriate discount rate for FCFF when trying to calculate EV using WACC related methods.
What if the growth rate (g) is higher than WACC?
The perpetuity growth formula Vfirm = FCFF1 / (WACC – g) is mathematically undefined or yields a negative value if g >= WACC, implying infinite or meaningless value. A constant growth rate cannot exceed the discount rate indefinitely in a stable model. If you project high short-term growth, a multi-stage DCF model is more appropriate before using a lower long-term g.
Is this EV calculation the only way to value a company?
No, this is one method based on a DCF approach with perpetuity growth. Other methods include comparable company analysis, precedent transactions, and multi-stage DCF models. See our DCF Calculator for a more detailed approach.
How do I estimate the long-term growth rate (g)?
The long-term growth rate should reflect the mature growth phase of the company and is often capped at or below the long-term nominal GDP growth rate of the economy it operates in.
How do I calculate WACC?
WACC is calculated by taking the weighted average of the after-tax cost of debt and the cost of equity. You can use our WACC Calculator for this.
Why is cash subtracted to get EV from Vfirm?
Vfirm (derived from FCFF/WACC) represents the value of operating assets. EV aims to reflect the value of core operations. Excess cash is often considered a non-operating asset, so it’s subtracted from Vfirm to arrive at EV using this framework. EV = Market Cap + Debt – Cash, and V_firm = Market Cap + Debt, thus EV=V_firm-Cash.
Can EV be negative?
Yes, if a company has a very large cash balance relative to its market capitalization and debt, its EV can be negative, suggesting the market values its core operations less than its net cash.
Related Tools and Internal Resources
- WACC Calculator: Calculate the Weighted Average Cost of Capital for your company.
- DCF Valuation Calculator: Perform a more detailed Discounted Cash Flow valuation with multiple stages.
- Free Cash Flow Calculator: Estimate Free Cash Flow to Firm (FCFF) and Free Cash Flow to Equity (FCFE).
- Terminal Value Calculator: Calculate the terminal value using different methods for DCF analysis.
- Cost of Equity Calculator: Determine the cost of equity using CAPM or other models.
- What is Enterprise Value?: An in-depth article explaining the concept of Enterprise Value.