The Little Book of Valuation, Updated Edition

Chapter ThreeYes, Virginia, Every Asset Has an Intrinsic Value: Determining Intrinsic Value

IMAGINE YOU ARE AN INVESTOR LOOKING to invest in a share of Kraft Heinz (KHC), a food processing company with some of the most recognized brand names in the world. Based on the information that you have on the company right now, you could estimate the expected cash flows you would get from this investment and assess the risk in those cash flows. Converting these expectations into an estimate of the value of KHC is the focus of this chapter.

Value the Business or Just the Equity?

In discounted cash flow valuation, you discount expected cash flows back at a risk-adjusted rate. When applied in the context of valuing a company, one approach is to value the entire business, with both existing investments and growth assets; this is often termed firm, or enterprise, valuation. The other approach is to focus on valuing just the equity in the business. Table 3.1 frames the two approaches in terms of the financial balance items introduced in Chapter 2.

Table 3.1 Valuation Choices

Measure	Explanation
Assets in place
+	Growth assets
=	Value of business	To value the entire business, discount the cash flows before debt payments (cash flow to the firm) by overall cost of financing, including both debt and equity (cost of capital).
−	Debt	From the value of the business, subtract ...