When calculating FCFF, I got the answer of 5766.20 alright.
Now my question here is:
So we calculate the value of Equity by subtracing the value of debt from assets (5766.20), right?
E = 5766.20 - 1800 = 3966.20
Then what’s the relevance of the info given in the problem that the firm is finance with 40% debt and 60% equity?
If we assume that’s true, the value of equity we calculate is: 5766.20*0.6 = 3459.72 which is incorrect.
This is not correct
When you have calculated FCFF to be X amount, you need to discount this amount by the Weighted average cost of capital to get the value of the firm.
After calculating the value of the firm, you may then proceed with multiplying my the weights as you have done.
Meant that the FCFF valuation is 5722.6, not FCFF by itself.
Multiplying by the weights gives a different answer than subtracting the debt directly.
The weights are used to calculate FCInv and WCInv in proportion to the amount thats financed with debt and equity. THe info is used to calculate FCFE
For whatever reason, I refuse to learn this equation where they use the target debt ratio. I just won’t.
If it comes up June 1st. I’ll just put up my hands and say ‘woops’.