2012 Afternoon Mock Exam - Q regarding private company valuation approaches

Hi all, just a quick query regarding the above…

The offending question asks you to calculate the value of equity of the private company in question using the Capitalised Cash flow Method (CCM) - so I worked out the FCFF, capitalised it, but then after subtracting the value of the company’s debt, my answer would not reconcile to any of their 3.

So obviously my eventual option was wrong. When they subtracted the debt from the capitalised FCFF figure, they subtracted Long Term debt, Notes Payable, AND Accounts Payable ----- and I’m sure that’s never counted as debt?! Or am I wrong! Or is it a small/private company valuation thing to also subtract the accs payable??


aaaaaaany takers?

It’s a definition problem.

Equity value accounts for all the ownership interest in a firm and you as the equity investor subtract out the liabilities, liabilities that you don’t like eg. MV of debt, short-term liabilities, off-balance liabilities, contigent liabilities, DTL, etc, to get to lower equity value (better bargaining power for M&A negotiations).

(1) In this case, you are looking from the pespective of the acquirer which the question said

the buyer will assume the target’s entire outstanding debt, including both current liabilities and long-term debt.

(2) Another way to look at this is, if you didn’t get the answer if you didn’t deduct the AP, try the second definition and deduct it out. If you don’t have the best answer, try the second best answer. It’s one of those things like “Convexity divided by 2? Use E1 or E0 to get PVGO? Use Beginning Equity or Average Equity in ROE?” gray areas that people are still bickering about. Sucks but that’s part of the reality.

Man you’re absolutely right - and that part of the question storyline had slipped out of my head by the time I got to the question, my bad!

Get what you’re saying though, you have to make plenty of assumptions! That same item set to calculate equity value using EV/EBITDA, they only subtracted Long Term Debt from EV to get equity, and left Notes Payable & Accounts Payable in!

Thanks again bud.

No problem wink

Also for this, usually you see the formula Value of Equity = Value of Firm - Market Value of Debt. Here they are using Book Value of Debt.