What does PV of FCFs plus terminal value yield in a DCF analysis?

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Multiple Choice

What does PV of FCFs plus terminal value yield in a DCF analysis?

Explanation:
In a DCF, you’re valuing all the cash flows available to the firm’s providers of capital. When you project free cash flows to the firm (unlevered FCF) and discount them at the firm’s WACC, you’re valuing the entire enterprise. Add the terminal value, which captures the value of cash flows beyond the explicit forecast, and you get the Enterprise Value. In short, PV of the free cash flows to the firm plus the present value of the terminal value equals the Enterprise Value. If you instead used cash flows to equity, you’d arrive at Equity Value after adjusting for debt and cash.

In a DCF, you’re valuing all the cash flows available to the firm’s providers of capital. When you project free cash flows to the firm (unlevered FCF) and discount them at the firm’s WACC, you’re valuing the entire enterprise. Add the terminal value, which captures the value of cash flows beyond the explicit forecast, and you get the Enterprise Value. In short, PV of the free cash flows to the firm plus the present value of the terminal value equals the Enterprise Value. If you instead used cash flows to equity, you’d arrive at Equity Value after adjusting for debt and cash.

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