Yello, hope all are getting ahead in their studies. Right, I know I am missing something simple here, so if someone could point out what it is I’d appreciate it. Both options make intuitive sense but contradict each other. When projecting the cash flows of a project, you’ll take all cash flows into account. Interest, tax, fixed cap inv, working cap inv etc etc. Then to fund this project you’ll use your optimal capital structure of Debt and Equity, and consequently calculate the discount rate as WACC (makes sense, because thats how you’ll find the project) When valueing a firm using the FCFE, you’ll use all the same inputs (working cap will differ by the change in value of cash and marketible secutrities) and your discount rate will be the required rate of return on equity (makes sense because you are calculating that part of the value which relates to equity holders) Umm… I was hoping this would happened, answered my own question. Thought I’d post it anyway. FCFE only values the Equity, to get the value of the firm you need to then add on the market value of debt, cash and marketable securities. I would be very surprised if these two methods came up with reasonably similar figures though. Push on!! Just over 3 months left!!
In theory, they should produce the same figures