Julian Shocron: Chapter 4, What the Bakery Is Worth

Value is an estimate, never a fact. This chapter tries two common routes with the bakery's fixed figures and shows why they land in very different places.

Route one: discounting the cash

A payment that arrives in a year buys less than the same payment now, because today's money could already be earning something. Discounting turns future amounts into today's terms.

Take the 35 of free cash flow from Chapter 2 and assume it arrives at the end of each of the next three years. At a 10% rate:

Three years of cash add up to 105 on paper but only 87.0 in today's money.

How much the rate moves it

Four points of rate shift the answer by about 6. With longer horizons the effect grows, which is why the chosen rate deserves as much scrutiny as the cash forecast.

Route two: a multiple

A faster shortcut is to price the whole operation as a multiple of EBITDA. At 6 times:

6 × 170 = 1,020 of enterprise value, the price for the business regardless of who funded it.

From the business to the owners

Lenders get paid first. Subtract the net debt from Chapter 3:

1,020 − 170 = 850 of equity value, the slice left for the owners.

Why the two routes disagree

The discounting exercise counts only three years, so it captures a fraction of a business that may run for decades. The multiple quietly assumes the bakery keeps going indefinitely. Neither is wrong; they answer different questions. Seeing the gap is the lesson.

Quick check

• Year values summed: 31.8 + 28.9 + 26.3 → 87.0
• 6 × 170 = 1,020 · 1,020 − 170 = 850

Assumptions used here: cash flows of 35 arrive at each year end; the 6x multiple is illustrative, not drawn from any real market.

Related note: Julian Shocron on discounted cash flow. Previous: Chapter 3 · Back to the casebook index.