Question 11.A.4: If the net present value of future cash flows generated by t...

Financial Management for Decision Makers

If the net present value of future cash flows generated by the business represents the value of the business as a whole, how can we derive that part of the value of the business that is available to shareholders?

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A business will normally be financed by a combination of loan capital and ordinary shareholders’ funds. Thus, holders of loan capital will also have a claim on the total value of the business. That part of the total business value that is available to ordinary shareholders can therefore be derived by deducting the market value of any loans outstanding from the total value of the business (total NPV). Hence:

Shareholder value = Total business value – Market value of outstanding loans

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