How is the value of a firm's operations typically assessed?

The value of a firm's operations is most accurately assessed based on the present value of expected free cash flows, discounted at its weighted average cost of capital (WACC). This approach reflects the intrinsic value of a company by factoring in its capacity to generate cash flows in the future, which is essential for understanding how much the operations are worth to investors.

By using the present value calculation, this method takes into account the time value of money, recognizing that future cash flows are worth less today. The discount rate applied, which is the WACC, reflects the average rate of return that investors expect for providing capital to the company, factoring in the risk associated with those cash flows. This comprehensive evaluation captures both operational performance and market risks, leading to a more accurate reflection of a firm's value.

In contrast, assessing value as the book value of its assets often does not reflect the current market conditions or future earning potential, making it less reliable. Market capitalization considers the company's stock price but does not directly measure operational performance or future cash flows. Lastly, evaluating only the company's liabilities ignores the revenue-generating aspects of the business, which are critical for understanding overall firm value. Therefore, focusing on expected free cash flows, discounted by WACC, provides a holistic and financially