Let’s take for instance EOC 7, why is the equity value of the firm different when using the FCFE method and the FCFF - Debt? I would expect the results to be equivalent. In that case, which is the “correct” equity value?
Im not quite sure what you mean but I suspect the confusing lies with what FCFE and Equity means. Equity Value is the value of the firm after paying debt holders, where FCFE is a cashlow measure to the holders of equity. If you’re estimating Equity value using FCFE, you would discount the FCFE (t= 1) at (r-g).
This would give you the Equity value of the firm.
Hope this helps
They are simply two different methods of getting equity value, which yield similar but not identical results.
The question will always indicate which path you should take.
Remember that through the exam we are looking at different models that estimate things with different assumptions.
Thanks. I am preparing interviews at the same time as the CFA and I thought that would be a nice question an interviewer could ask to throw a candidate off his feet. That’s why I wanted to think about it before getting caught.
Value of equity = value of firm - Debt . It is not FCFF or FCFE from where you deduct the debt portion .And then Value of equity you divide by the # of outstanding shares to come up to the value per share.
I hope it works …Pls get back if there is anything else.
indeed value of equity is not FCFF or FCFE from where you can deduct the debt portion , In fact it is the FCFE , a Cash flow measure discounted at WACC which takes you to the Firm value , Debt holders have the priority claim so after giving their share what you are left with is return to equity holders.
Did you mean FCF’F’ discounted at WACC?