FCFF Model and Common Equity extraction

CFA Level II
#1

Good Afternoon,

Any straight to the point explain on why when estimating capital value with the FCFF we just retract Debt market value to get the common equity value?

Why if there are other liabilities we don’t take them in account?

Just went on an exercice where those were the same of the debt value…

Thanks,

#2

Other liabilities are accounted in changes in non-cash working capital when you calculated FCFF. You should reduce both long-term and short term debt from FCFF to arrive at FCFE as well as interest adjusted for taxes.