Topic Test - Value of a target company

CFA Level II Corporate Finance
#1

Hi,

I have a very elementary question! Does the value of a company include debt or exclude it, and why (i am leaning towards EV where we include debt). Specifically, i am referring to this question:

Exhibit 4: Estimates and Assumptions of Mike Noth Used in Valuing National Plastics as of January 2013

($ millions except WACC)

2013

2014

2015

2016

Thereafter

End-of-year free cash flow to firm

170

165

180

195

Growth at 5% a year WACC

10.50%

Total debt immediately following acquisition

650

Based on Noth’s assumptions in Exhibit 4, the most that Zenith should be willing to pay per share of National is closest to: Answer $40

#2

You should use FCFF model to find the value of the firm, then take off debt. It will give you the value of equity

#3

Okay, so if i am looking at it from the point of view of an acquirer, the maximum amount he should be willing to pay, should deduct debt that the company can take on after acquisition…why?