Rather than repeat that exercise, we will restate the
conclusionsintermsof enterprisevaluemultiples.Holding
othervariablesconstant,beingabletomaintainhighgrowth
withexcessreturnsforalongerperiodwillincreaseenterprise
value multiples. As a consequence, we would expect
companies with stronger and more sustainable competitive
advantagestotradeathigherenterprisevaluemultiplesthan
firms without these advantages.
The Risk Effect
Riskaffectsenterprisevaluemultiplesintwoways.Oneis
throughtheriskandthecost ofequity,and theotherisby
wayofthedebtratioandthecostofdebt.Maturefirmswith
low default and operating risk will be able to borrow
substantialamountsatalowcostwithoutputtingtoomuch
upwardpressureontheircostsofequity.Asaresult,theywill
enjoylow costsof capital.Risky companies willhavenot
onlyhighcostsofequitybutalsohighcostsofdebtifthey
borrow, resulting in high costs of capital.
Thesimplestwaytoseetheeffectofriskonenterprisevalue
multiplesisthereforethroughthecostofcapital.Returningto
Illustration 9.2 and holding all other variables fixed, we
examine the effect of changing the cost of capital on
enterprisevaluemultiplesinTable9.5.Asthecostofcapital
increases,enterprisevaluesdecreasedramaticallyacrossthe
board.Thus,afirmwithanexpectedgrowthrateof 9 percent
canexpecttotradeat 23 timesEBITDA,ifitscostofcapital
is 6 percent, but atonly3.5 timesEBITDA if thecost of
capital rises to 15 percent.
TABLE 9.5Cost of Capital and Enterprise Value Multiples