Someone remind me please, if a question provides enough information to calculate FFCF value, why do we remove debt to calculate the price we would pay to aquire it?
Hello Galli,
Not sure if i understand you correctly but:
Because the price we would pay to acquire (own) a company is the stock price. Since the stock price is based on the value of equity, we should not include debt in calculating stock price.
Did i understand you correctly?
I think you do but here’s more context, I did a practice problem where I calculated the FFCF and the question asked what value would we pay for this company? It didn’t mention equity so I just used the FFCF valuation.
Reviewing the answer, it stated we should remove the MV of the debt in order to calculate the equity value. Revisiting my notes, I have written down that Equity Value = Firm value (FFCF valuation) - MV of debt. Just seems a bit vague in the wording, if they would have asked for equity value I would have removed the mv of the debt.
It did seem very vague.