What a business is worth

Ask someone who says they know valuation why interest expense does not appear in unlevered free cash flow. A lot of them cannot answer, and the reason is that they learned a DCF template before they learned what it is valuing. So start here, because the rest of the module depends on this distinction and nothing else does much work without it.

Two different questions

What are the shares worth? That is equity value, and for a listed company the market answers it every second: share price times share count.

What is the business worth? That is enterprise value, and it is a different number because the business is funded by lenders as well as shareholders. Buy every share of a company with $10B of debt and you have not bought a debt-free company. You have bought a company with $10B of debt.

Learn it in both directions. A DCF produces an enterprise value and you walk down to a share price. A comp set gives you a market price and you walk up to an enterprise value so the multiples are comparable. Same bridge, opposite direction.

The bridge on real numbers

Balance sheet figures from Target Corporation's Form 10-K for Fiscal 2025. The share price is a dated snapshot and will be stale.

$68,800M of equity, $10,968M of net debt, $79,768M to own the operations. On $8,251M of EBITDA that is 9.7x, and on $104,780M of revenue it is 0.76x. Those are the numbers a comp set compares.

Which metric pairs with which value

This is the rule that stops most valuation errors, and it is one sentence: a multiple's numerator and denominator must belong to the same claimants.

EBITDA sits above interest, so it belongs to lenders and shareholders together and pairs with enterprise value. Net income is after interest, so the lenders have already been paid and it pairs with equity value. Anyone who computes market cap divided by EBITDA has mixed the two, and the answer will make a levered company look cheap.

The same rule answers the interest question from the top of the page. Unlevered free cash flow belongs to everyone, so it cannot have interest deducted, because deducting interest is paying one group before measuring what belongs to all of them. The cost of debt is already inside WACC, and counting it twice would value the business at less than it is worth.

The share count is not the obvious number

Equity value divided by shares gives a price, and the share count has to be diluted. Options and restricted stock will become shares, and the treasury stock method is how they get counted: assume exercise, assume the proceeds repurchase stock at the market price, count only the difference.