A company has significant non-operating assets. How would these affect the calculation of enterprise and equity value in a DCF?

In the context of calculating enterprise and equity value through a Discounted Cash Flow (DCF) analysis, non-operating assets play a crucial role in determining the overall value of the company. Non-operating assets refer to assets that are not utilized in the core operations of a business, such as excess cash, investments in other companies, or real estate not used in the business operations.

When performing a DCF analysis, the enterprise value is derived from the present value of the company’s projected cash flows, which typically includes only operating assets (i.e., the value generated by the business's core operations). However, when it comes to determining equity value, it is essential to account for non-operating assets because they represent additional value that shareholders can realize.

To derive equity value from enterprise value, the company's total debt is subtracted from enterprise value. Non-operating assets are then added to the equity value calculation, as they represent resources that the shareholders can benefit from directly. This is why adding these non-operating assets increases the equity value, resulting in a more accurate reflection of what shareholders could potentially realize from their investment.

In summary, non-operating assets enhance equity value in the context of a DCF analysis because they are valuable resources beyond the