I was just reviewing fcfe and thought I remembered reading in the cfai texts that when you value a firm you plan to buy out you add the balance sheet value of cash and marketable securities to fcfe reach the final sale value. The reasoning being if you purchase a firm for the pv of fcfe and they have $1mm in cash that immediatly goes into your account then you essentially buy it at a $1mm discount. Can anyone familiar with the cfai texts either confirm or deny this. Could be worth a point.
Don’t recall this.
i remember reading that add the value of cash and mktable securities to the fcfe value I can’t recall the reasoning though
Swanny, I think I recall…maybe remebering…something to this effect…perhaps- FCFE has to do with cash generated to pay equity investor from OPERATIONS. You are interested in the ongoing prospects on generating cash to pay your stockholders. So the BV you start off with has the cash and securities subtracted out. So our normal FCFE number are calculated using only the BV used for operations, but if we want to buy the company the cash is still cash…so we have to add them back. Others may be able to help more. If not I can try to break out the books. I have only used schweser and I remember this, so it should be in there (I don’t think I read that on AF).
yes…that is EV…enterprise value…value of all assets minus cash and investments. You don’t value the investments and cash because they are essentially “free”. Thus when valuing the company. You only include what you have to “buy”