DCF Economic Profit (EP)

The DCF – EP method is a variant of the DCF – WACC, where future value creation (the Economic Profit, EP) is made transparent per period.

The EP of a period is equal to the Noplat (the realized return) minus the required return. A positive EP indicates that value is being created in that particular period.

The required return is determined by multiplying the invested capital that was present at the beginning of the period by the WACC.

The periodic EPs are discounted to the valuation moment using the WACC. The present value of the future EPs is also referred to as the Market Value Added (MVA).

The operational enterprise value is equal to MVA plus the value of the invested capital at the valuation moment.

To arrive at the economic value of the equity, the excess liquid assets and the market value of non-operating assets are added to the value, and the market value of the debt is deducted.

This valuation method is one of the 6 valuation methods in the Valid Value model