Hello: When using the formula V0= FCFF1 / wacc - g or V0 = FCFE1 / rce - g Do we subtract the value of debt from FCFF / FCFE ? How do we do this? Thanks!
Those formulas are correct. If they ask you to find value of equity, you calculate FCFF and then deduct mkt value of debt to get equity.
FCFF gives you a V0. From that you deduct the market value of debt to get the MV of Equity. Divide by # of shares to get Share price. FCFE - directly gives you value of equity. Remember Net Borrowing has been added (subtracted) while arriving at FCFE. Now you directly get V0 = Value of equity from the FCFE formula.
wow, you guys are fast, I only refresh like a second, then two posts already
cfaboston28 Wrote: ------------------------------------------------------- > Those formulas are correct. If they ask you to > find value of equity, you calculate FCFF and then > deduct mkt value of debt to get equity. Yep I learned this last night on the mock mini… DOH!
CBB, I made the same mistake in that exam. Hopefully won’t make that again
cpk123 Wrote: ------------------------------------------------------- > FCFF gives you a V0. From that you deduct the > market value of debt to get the MV of Equity. > Divide by # of shares to get Share price. > > FCFE - directly gives you value of equity. > Remember Net Borrowing has been added (subtracted) > while arriving at FCFE. > > Now you directly get V0 = Value of equity from the > FCFE formula. So we should only calculate share price as P = FCEE / (rce - g) ? or P = FCFF + int(net tax) - NB / (rce - g)
FCFE * (1+g) / r-g (should use it as DDM method)
Hey cpk123, we should subtract the debt value, I saw several examples giving 2 figures, long term debt and current portion of long term debt, so the sum should deducted, right? I mean the sum of the current portion and the long term debt gives us the debt value…; Thanks! M.
malek, I believe so, but make sure it’s market value. Remember the whole gamut of firm value, Firm value = market value of equity + market value of debt + non-operating assets (like cash and mktble securities) When we calculate FCFF (firm value), we only look at operating assets so we might be leaving off some valuable non-operating assets / cash on the balance sheet. If we we would like to calculate the value to equity shareholders, then equity value = firm value - market value of debt
Some non-operating assets: Excess real-estate Overfunded pension plans Stock investments This is when you turn into Ben Graham and look for these things above and beyond your your discounted cash flows…