Business Metrics

Discount Factor / Rate

The discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the bank through the discount window loan process.

Second, the discount rate refers to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows.

Discount Period

The discounted payback period is a capital budgeting procedure used to determine the profitability of a project. A discounted payback period gives the number of years it takes to break even from undertaking the initial expenditure, by discounting future cash flows and recognizing the time value of money. The metric is used to evaluate the feasibility and profitability of a given project.

Enterprise Value (EV)

Enterprise value (EV) is a measure of a company's total value, often used as a more accurate and comprehensive alternative to equity market capitalization since it takes into account factors like debt and cash reserves.

EV includes in its calculation the market capitalization of a company but also short-term and long-term debt as well as any cash on the company's balance sheet. Enterprise value is a popular metric used to value a company for a potential takeover and hence can be seen as a potential takeover price of a company.

Formula for EV:

EV = MC + Total Debt - C

Where:

MC = Market capitalization; equal to the current stock

price multiplied by the number of outstanding stock shares.

Total Debt = Equal to the sum of short-term and

long-term debt.

C = Cash and cash equivalents; the liquid assets of

a company, but may not include marketable securities.

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Enterprise Value is also used as a key metric to determine valuation multiples like the exit multiple.

Equity Value

Equity value is the value of the company's shares and loans that the shareholders have made available to the business.

It is calculated by taking enterprise value, (+) adding redundant assets, and then (-) subtracting debt net of cash available. Debt and debt equivalents, non-controlling interest, and preferred stock are subtracted as these items represent the share of other shareholders. Cash and cash equivalents are added as any cash left after paying off other shareholders are available to equity shareholders.

Equity value is concerned with what is available to equity shareholders. Once the total equity value is determined, it can be further separated into the value of shareholders' loans and shares outstanding (common and/or preferred).

For further explanation and formulas click here.

Free Cash flows (FCF)

Free Cash Flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the non-cash expenses of the income statement and includes spending on equipment and assets as well as changes in working capital from the balance sheet.

Terminal value (TV)

Terminal Value (TV) is the value of an asset, business, or project beyond the forecasted period when future cash flows can be estimated. Terminal value assumes a business will grow at a set growth rate forever after the forecast period. Terminal value often comprises a large percentage of the total assessed value.

Analysts use the discounted cash flow model (DCF) to calculate the total value of a business. DCF has two major components—the forecast period and terminal value.

There are two ways to find Terminal value:

Perpetuity Method

Exit Multiple Method