Ann: Company update and diversification strategy, page-13

Just two things, at risk of sounding pedantic, because I know you are aware of both issues @Jimmy_C:

1. Your formula should be: EV = (E*M)/(1+R)^T
2. The formula ignores the value of dividends.

Whilst I have no fundamental issue with the method, I believe that EV based approaches need to be used with caution. In my opinion, the method implies that the excess cash (that not required to support operations) will be returned to the purchaser immediately (or conversely that net debt will be retired immediately), or that an equal amount of value will be created.

If the business has an ability, or can be trusted, to deploy its capital profitably, then an EV based method may actually be conservative, as the value created is likely to exceed the face value of the excess cash (even if the cash sits on the balance sheet for several years).

However, if the cash is returned to shareholders several years down the track, such as via a capital return, then strictly this cash needs to be discounted by a factor consistent with your desired rate of return, and as such the method will over state value. Even worse, if the business deploys the capital unprofitably (well really, at rates below your desired rate of return), the value overstatement will be even greater.