Hi, could anyone explain how i can determine which method is appropriate, FCFF or FCFE for calculation? I realized some questions on the sample exam asked which model should be used and i frequently pick the wrong one. could someone tell me what key words to look for? Thanks!
they tell you… all the time.
When the capital structure changes, use FCFF. When not, use FCFE. Both (FCFF, FCFE) assume control perspective (unlike DDM and variation of it).
CP, i have came accross questions such as : Which model would be most appropraite to value company xyz? A FCFF Model B FCFE Model C DDM Model How would i be able to tell between the FCFF and FCFE?
FCFE it’s easier
there - what map1 says above applies. DDM - Dividend - no control. Minority ownership. If dividends become negative, and do not have any kind of relationship with the cash flows of the firm, FCFE/FCFF apply. FCFE - assumes control perspective. But if changing amounts of debt in the capital structure - or leverage of company is changing and often - FCFE can become a very volatile number. FCFE adds on Net Borrowing. Hence not good to use. FCFF - also control perspective. Can be used with no dividends, and with changing capital structure as well. FCFE @ Rce. FCFF @ WACC DDM @ Rce